Wednesday, August 6, 2008

The comparison of MoM and FoF

The comparison of MoM (manager of mangers) and FoF (fund of funds) by SEI:


Fund of funds

Additional Comments

Hires managers to manage discrete pools of assets within guidelines set by the Manager-of-Managers (MOM).Buys collective investment schemes accepting the parameters set by the manager.FOF is simply a unit holder while MOM is an active manager in the overall process.
Selects managers across a broad universe covering institutional and retail managers.Buys funds offered to retail investors.
Provides a close assessment of all risk factors across the portfolio.As a unit holder there is limited ability to assess risk factors at the overall portfolio level.FOF has to persuade managers to provide underlying portfolio information that they are reluctant to do on a regular basis.
Individual manager’s activity is controlled through the mandate guidelines and close monitoring of manager activity.As a unit holder the FOF has no control over the activities of manager’s whose funds they have purchased.FOF is limited to buy and sell decisions.
Through the mandates and manager monitoring, style specific managers can be employed to create style-diversified portfolios to reduce the risk of exposure to a specific style.With limited ability to assess risk factors within a portfolio it is much harder for a FOF to maintain the proper balance between style specific managers.Style has a large impact on the returns of active managers and is generally random and therefore difficult to predict. Creating stylediversified portfolios reduces the risk of being over exposed to any one style across a market cycle, producing more consistent returns.Many FOF are offered by investment houses that take views on style and try to style time to some degree.
MOM rebalances portfolios at both the manager and client level ensuring that the client does not over time drift into a different risk profile than the initial investment.Most FOFs carry out some rebalancing to avoid clients drifting into a different risk profile.The cost of rebalancing a FOF is greater as it involves buying and selling retail funds.
Cash levels are monitored and equitised on a daily basis to ensure fully invested positions.No control over cash levels retained in funds. Some FOFs also try to add value through market timing.Market timing is high risk and difficult to successfully implement. None of the MOMs employs market timers, as we cannot find a manager with consistent skill. We also know that cash over time is a drag on equity and bond returns, equitising cash adds value therefore over the long term.
Requires considerable assets as managers have minimum account sizes when hiring them and significant resources in systems and skilled manager researchers to implement and maintain.Requires minimal assets, resources or skill to implement.Few organisations have the overall resources necessary to be a successful MOM.
MOM are independent of the managers they employ.Many FOF are owned by investment houses and will include in-house funds to various degrees – this can provide them with higher income.A few FOF have recently removed in-house funds from their portfolios to avoid being accused of doubling fees and not being independent.
As MOM hires managers this is done at institutional rates and provides certain pricing advantages in the market as a single management fee can be offered combining both the MOM and the underlying managers.As well as their own fees, FOF have to buy funds that come with higher expenses and therefore are at a price disadvantage.MOM offers not only a superior investment solution but represents better value and is more transparent in its charges.

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