Fund of funds offers chance to move into the premier league

Q I HAVE recently been advised that a "fund of funds" is a recommended platform for investing with a view to medium-term (three to eight years) growth, but it comes with the usual caveat that all investments can fall as well as rise, so I wondered what your thoughts were on such an investment.

I have taken early retirement and would like my capital to work for me for several years before relying on it to provide an income.

CR Edinburgh

A Fund of funds are normally stock-market based and, as such, the investment value is subject to fluctuations due to the performance of the underlying assets. More importantly, past performance is not an indication of future returns and while these are caveats, they must be borne in mind when developing a successful investment strategy.

The investment time horizon requires careful consideration before buying any equity-based investment. In simple terms, the longer the investment term, the more time over which the investment can grow. In addition, a longer investment term will help control the investment risk as short-term volatility becomes less relevant.

A three-year investment term is the normal minimum period you should consider for a portfolio that is set up for pure capital growth. The rationale behind this is that short-term fluctuations could erode the value without enough time for the investment value to recover.

Fund of funds, also referred to as multi-manager funds, are collective investment funds that buy other funds as their underlying investments as opposed to direct shares, bonds or other securities.

The main theory behind this approach is that not all fund managers perform well in all markets and that by spreading the investment over a select number of funds, the level of diversification is increased and further mitigates investment risk.

While this is also the case for funds that buy direct shares, the total level of diversification is going to be wider as each fund purchased as a separate underlying portfolio has a distinct style of investment management, which further stratifies the fund of funds.

Traditional funds will have an asset allocation that spreads the investment over a number of geographical sectors and asset classes. Equities are then bought to mirror this in the allocation. Funds of funds will also invest across different sectors and asset classes, but instead of direct equities, they will invest in a range of specialised funds.

One significant benefit of investing in fund of funds is that investors are able to access investment funds and strategies that usually require high investment amounts, such as hedge funds and private equity funds.

When investing in fund of funds it is important to consider the charging structure in comparison to ordinary collective.

Fund of funds typically have a higher management charge because the manager will apply a charge in addition to the underlying funds that also have a charge attaching to them. Effectively, therefore, there is an element of double charging involved in a multi-manager approach.

• Christian Poziemski is a wealth manager within the private client and financial services department of HBJ Gateley Wareing

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.z