Quick facts on funds of funds, wrap funds, multi-manager funds and linked products

Introduction

Many investors invest in more than one fund in order to diversify away the risk of selecting the wrong fund manager or management style. Selecting a range of collective investment portfolios enables them to spread investment risk. To meet this need for diversification, packaged products have been designed, which allow investors to invest in a single product consisting of a number of collective investment portfolios or investment portfolios bundled together to suit particular risk/return profiles.

Packaged products include funds of funds, wrap funds and linked products, all of which have collective investment portfolios as underlying investments. Multi-manager funds differ in that the underlying investments are not collective investment portfolios, but investment portfolios managed specifically for the multi-manager.

Fund of funds

A fund of funds is a normal collective investment portfolio fund that invests in a range of other collective investment portfolios. These could be funds within a collective investment portfolio management company's own range (internal fund of fund) or a selection of funds managed by various collective investment portfolio management companies (external fund of fund). A fund of funds may not invest in less than two underlying collective investment portfolios.

Linked Investment Services Providers (LISPs)

LISPs offer a range of investments linked to collective investment portfolios and other underlying investments. LISPs provide administrative systems to combine various retail investment products including collective investment portfolios, funds of funds, multi-manager funds and wrap funds. By investing through a LISP, investors are given access to a wide range of underlying investments. LISPs also offer compulsory financial products such as retirement annuities and provident funds that are linked to underlying collective investment portfolios.

Wrap Funds

A wrap fund is a portfolio comprising underlying investment products wrapped into a single product. The underlying investments need not be collective investment portfolios. A wrap fund is not a registered collective investment portfolio, but most wrap funds hold a portfolio of separate collective investment portfolios and money market accounts/instruments. The underlying combination of investment tools or instruments is selected to meet the risk/return requirements of individual investors. The combination of the underlying instruments is typically conservative, balanced or aggressive.

Multi-manager funds

A multi-management collective investment portfolio invests in a blend of specialist portfolios of equities and fixed interest instruments, by combining the investment styles of different fund managers into one investment product. A multi-manager collective investment portfolio has a few fund managers, each responsible for managing a portion of the overall portfolio. Each portfolio manager follows a specific investment mandate, as specified by the multi-manager, and the managers are usually selected based on their strength in that particular area. The final combination of these mandates is balanced to meet a specific risk profile. This portfolio is then managed on an ongoing basis to ensure that the investment managers are true to mandate, and that market conditions still support the underlying portfolio mix.