A new study by Vanguard seeks to dispel myths about fund investment strategies. According to the report, which ran as a white-paper PDF on the company’s website, there is little actual difference between multi-manager and single-manager funds.
Common belief has often reflected more confidence in direct investing, or single-manager funds. These funds are typically believed to generate stronger performance because they are more concentrated and “active.”
Multi-manager funds, or funds that invest in a variety of other funds under the control of different asset managers, have typically held a stigma of being more likely to charge high fees and offer weaker performances.
While Vanguard’s report shows that single-manager funds have produced wider dispersion in their returns, there appears to be no difference in median returns.
Multi-manager funds are often criticized because of what investors see as unjustifiably high fees to assemble sub-advisers into a portfolio and for the poor performance that results from the fees and "diluted ideas."
Vanguard’s research seems to dispute all these criticisms.
For example, according to Vanguard’s report, multi-manager funds had a lower median expense ratio over the 15-year period its research covered. While single-manager funds averaged costs in the 50th percentile, the median costs for multi-manager funds hovered in the 25th percentile.
The same applies to performance results. Though many investors assume single-manager funds are likely to have higher median returns, Vanguard’s research shows that multi-manager funds actually have a slightly higher median of excess returns.
“Success or failure, therefore, is not substantially influenced by fund structure,” the white paper explains.
The report concludes that while considering fund selection, cost is significantly more important than whether the fund is single- or multi-manager.