Funds of funds
As its name suggests, a fund of funds is a fund that invests only in other unit trusts, OEICs and other funds recognised by the Financial Services Authority. A fund of funds can itself be structured as either a unit trust or an OEIC fund.
A fettered fund of funds limits its investment range to the funds run by the manager. So, for example, the ABC Fund of Funds would only invest in other funds managed by ABC.
An unfettered fund of funds is not so constrained and can invest in any fund recognised by the Financial Services Authority.
Most experts believe unfettered fund of funds are preferable because no one manager has a monopoly of all the best funds covering every investment sector.
There are four main advantages of investing through funds of funds:
- You benefit from active management. This means a professional fund manager takes the difficult decisions about which sectors and which funds to choose
- Your investment is broadly diversified because each underlying selected fund within the fund of funds will itself have a spread of investments
- You save on the paperwork and administration involved in owning and managing holdings in a variety of funds
- The structure could save you capital gains tax.
The fund of funds principle is broadly similar to that followed by more traditional, tailored fund management services, but there are certain technical differences. With a traditional, tailored service you are the owner of the various funds in which the fund manager invests on your behalf. With a fund of funds service you do not own the underlying funds in which the fund manager invests. This difference could potentially lead to additional paperwork if you were to choose a traditional, tailored service. However, in practice the tailored fund service manager usually makes your investments through nominee accounts, thereby keeping your paperwork to about the same level. However, the two routes have different tax implications. Under a traditional, tailored service, because you are considered the owner of the underlying fund investments, any sales made by the fund manager would give you a potential capital gains tax liability, even if the proceeds are switched directly into another fund. This situation does not arise with funds of funds.
To learn more about New Star's funds of funds, we recommend that you talk to a financial adviser. Search for your
nearest independent financial adviser (IFA) or view our
full range of unfettered funds of funds.
