The appeal of a multi-asset fund of funds is understandable. You make one investment, delegate all the portfolio construction decisions to a professional manager, and receive a diversified portfolio spanning equities, bonds, property, and alternative assets. No monitoring, no rebalancing, no asset allocation decisions. Simply invest and let the manager do everything.
For internationally mobile investors managing complex lives across multiple jurisdictions, this simplicity has genuine value. But multi-asset funds of funds carry structural costs that erode returns significantly over time. Understanding whether the convenience is worth the price — and when simpler alternatives may serve you better — is the purpose of this article.
What Is a Fund of Funds?
A fund of funds (FoF) is an investment vehicle that holds other funds rather than individual securities directly. A multi-asset fund of funds combines funds across different asset classes — equity funds, bond funds, property funds, alternative funds — to build a diversified portfolio within a single product.
The investor pays charges at two levels:
- The charges of the underlying funds held within the FoF (the ongoing charges figure of each sub-fund)
- The charges of the FoF itself (management fee, administration costs)
This dual-layer charge structure is the central cost concern with fund of funds investing.
Types of Multi-Asset Funds
The term "multi-asset fund" encompasses a broad range of products:
Fund of Funds (FoF): Invests in other collective investment schemes. The manager selects underlying funds from a range of third-party providers (open architecture) or from its own range (captive architecture).
Multi-asset direct funds: Invest directly in securities across multiple asset classes rather than through underlying funds. Avoids dual-layer charges but requires the manager to have expertise across all asset classes.
Risk-rated model portfolios: Not technically a fund, but a portfolio of funds or ETFs constructed to a specific risk level. Often used by financial advisers to provide diversified exposure for clients.
Blended ETF portfolios: A newer development — single ETFs that hold multiple underlying ETFs across asset classes, similar to a FoF but using ETFs as the underlying vehicles.
The Dual-Layer Charge Problem
The cost of a fund of funds is the sum of two layers:
Example: A moderate-risk multi-asset fund of funds with a stated OCF of 0.85%, investing in underlying funds that each charge 0.75% on average.
Total ongoing cost to the investor: approximately 1.60% per year.
Compare this to:
- A simple two-fund portfolio (global equity ETF + global bond ETF): 0.10–0.20% per year
- A five-fund diversified ETF portfolio: 0.15–0.25% per year
The fee gap of approximately 1.3–1.5% per year is compounded over the investment period. Over 20 years, the impact on a £500,000 investment (assuming 7% gross returns) is approximately £350,000–£400,000 in lost wealth due to the fee differential alone.
Not all fund of funds are this expensive. Some passive fund of funds — using underlying index ETFs or index funds — carry much lower total costs. Vanguard's LifeStrategy range, for example, is a multi-asset fund of funds using Vanguard index funds as the underlying components, with an OCF of around 0.22% total. These products are competitive on cost and substantially more efficient than actively managed equivalents.
The key question is always: what are the underlying funds and what do they cost?
The Captive vs Open Architecture Question
Many fund of funds providers — particularly large asset management groups — use their own funds as the underlying investments. This "captive" approach means:
- The manager earns fees at both the FoF level and the underlying fund level
- There may be a conflict of interest in selecting the best underlying funds versus the most profitable for the group
- The range of available strategies is limited to what the group offers
In contrast, "open architecture" fund of funds select from a universe of third-party managers, theoretically choosing the best in each category. Open architecture products may provide better underlying manager selection but typically still carry dual-layer charges.
Investors should examine both the quality and the conflicts in the selection process.
Smoothed or With-Profits Funds of Funds
Some insurance company multi-asset products have a "smoothed" or "with-profits" mechanism that averages returns over time to reduce apparent volatility. These products can seem appealing to investors who find market volatility distressing — the value of the investment appears to rise steadily even when underlying markets fall.
However:
- Smoothed funds typically adjust their declared value (and the bonus rate) in response to market conditions, sometimes cutting bonuses sharply in falling markets
- The underlying guarantee structure of many with-profits products has been weak in practice
- Smoothing reduces apparent risk but does not eliminate underlying market risk
- Charges on with-profits products can be opaque and include multiple layers
- Market Value Reductions (MVRs) may apply if you exit at an inopportune time, penalising withdrawal
With-profits multi-asset funds are common in certain international markets and have been extensively sold to expat investors. They deserve careful scrutiny before investment and before withdrawal.
Where Multi-Asset Funds Add Genuine Value
Despite the cost concerns, multi-asset funds of funds may be appropriate in specific circumstances:
Small portfolios where diversification is otherwise difficult to achieve: For an investor with £20,000 to invest who cannot efficiently hold five separate ETFs, a single multi-asset fund provides diversification at low complexity. The proportional advantage narrows significantly for larger portfolios.
Investors who will not maintain a simple ETF portfolio without professional support: Research consistently shows that DIY investors make behavioural errors — panic selling, performance chasing — that cost more than professional management fees. If an investor genuinely benefits from having a manager who prevents them from selling in a crash, the management fee may be value for money.
Platforms where ETFs are unavailable: Some occupational pension schemes, insurance wrappers, or banking platforms only offer multi-asset funds rather than direct ETF access. The alternative to the FoF may be a single actively managed fund with the same or higher cost.
Target date funds: These multi-asset vehicles automatically become more conservative as a target date (e.g., retirement date) approaches, reducing the equity allocation over time. The automation has genuine value for investors who cannot or will not actively manage their allocation glide path.
The Passive Fund of Funds: A Better Alternative?
The most compelling multi-asset products are those that use low-cost index funds or ETFs as their underlying components.
Examples include:
- Vanguard LifeStrategy funds (UK, Ireland-domiciled UCITS versions): Multi-asset funds holding Vanguard's own index funds. Total OCF approximately 0.22%. Available in 20%, 40%, 60%, 80%, and 100% equity allocations.
- iShares Core Allocation ETFs: Multi-asset ETFs holding iShares' own ETFs in fixed allocations (conservative, moderate, aggressive). Available in UCITS format.
- SPDR Portfolio ETFs (US-listed, for those who can access them): Multi-asset allocations using SPDR ETFs.
These products solve most of the cost concern while retaining the convenience of a single-fund portfolio. The Vanguard LifeStrategy equivalent effectively provides a diversified global portfolio for 0.22% per year — far cheaper than actively managed multi-asset funds while removing the need for the investor to construct and rebalance their own portfolio.
The limitations are less flexibility (fixed allocations with limited customisation) and less access to specialist asset classes beyond mainstream equity and bonds.
Building Your Own: Simple Alternatives
For investors comfortable with a modest degree of engagement, building a simple ETF portfolio achieves the same diversification at lower cost:
Two-fund portfolio: Global equity UCITS ETF (e.g., MSCI World or FTSE All-World) + Global aggregate bond UCITS ETF. Annual rebalancing once per year. Cost: 0.10–0.20% total. Suitable for most investors with a 10+ year horizon.
Three-fund portfolio: Developed market equity + Emerging market equity + Global bonds. Slightly better geographic control. Cost: 0.12–0.22% total.
Five-fund portfolio: Developed equity + Emerging equity + Global bonds + Global REITs + Global inflation-linked bonds. Adds real assets and inflation protection. Cost: 0.15–0.30% total.
The difference in complexity between a two-fund portfolio and a typical multi-asset fund of funds is modest — perhaps one hour per year of administration. The cost saving over 20 years on a £300,000 portfolio is potentially six figures.
Questions to Ask Before Investing in a Fund of Funds
- What are the total ongoing costs, including both the FoF charge and the underlying fund charges?
- Are the underlying funds active or passive? If active, what is the evidence that they add value above their cost?
- Is the selection of underlying funds captive (in-house only) or genuinely open architecture?
- Is the asset allocation fixed or does the manager adjust it tactically? What is the evidence that tactical allocation adds value?
- Is there a simpler, lower-cost alternative (passive FoF, direct ETF portfolio) that achieves the same exposure?
- What are the terms for exit — are there penalties, notice periods, or market value reductions?
Compliance Caveats
All investments can fall in value as well as rise, and you may receive back less than you invest. The performance of multi-asset funds varies widely and past performance is not a guide to future returns. Fund charges are disclosed in Key Investor Information Documents but total cost of ownership may be higher than the stated OCF. This article is for informational purposes and does not constitute personal financial advice.
How Global Investments Can Help
At Global Investments, we work through the full range of investment structures — fund of funds, multi-asset direct funds, ETF portfolios, and managed accounts — to find the most appropriate, cost-effective approach for each client's circumstances. If you hold an existing multi-asset fund and are uncertain whether it represents good value, we can conduct a cost and performance analysis and identify whether there is a better alternative. Contact us to arrange a review.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.