04 November 2013

FN: Funds of funds to change their game

Eric Warner, co-chief executive and head of investor relations at Altius Associates, said: “This is the biggest issue for institutional investors who are under intense cost pressure, because overall portfolio returns are so low". Fees have started to decline, he added, with incentives and discounts for early investors.

The rationale for a fund of funds strategy is to provide a whole market view and give clients access to compelling investment opportunities, he said. For investors who want a fully outsourced and professional solution for their private equity allocation it is still a relevant strategy. Gunn added: “We sift 150 to 200 funds a year to select the best and we see continued demand from investors who want access to that expertise.”

But it will need flexibility to keep the fund of funds approach relevant when the needs of investors are evolving beyond the scope of traditional commingled funds. For this reason, the fund of funds label has acquired a negative connotation for some.

A report from data provider Preqin published in the summer highlighted many of the issues affecting the private equity fund of funds industry. The combination of difficult fundraising conditions, weaker performance than other fund types and a deepening sophistication of investors has led to a reduction in investor appetite for funds of funds. This has sparked a degree of consolidation of the industry across the globe, with transactions involving US, European and Asian firms, the report noted.

Much of this long-term rise was because the industry rebounded from a low base after suffering from bigger-than-market falls in 2008 and 2009. However, funds of funds have been trading at a worse share price discount to net asset value – a key indicator of portfolio worth – than listed direct investors, according to data from LPX Group. Although listed funds of funds have traditionally had a bigger discount to NAV, the gap narrowed to almost zero in 2011 before widening again. By January this year, listed funds of funds were trading at a near-20 per cent discount to NAV, compared with about 10 per cent for listed direct investors.

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