In my eighteen years practising as a financial planner, I see far too often clients who have an investment, invested in a myriad of unit trust funds with no investment philosophy or framework guiding the choice of funds being implemented. This leads to a concept called “closet Indexing”

Closet indexation occurs when an investor buys such a wide range of investment funds that he ends up with the market return. The more funds you put into your collection, the more your net performance resembles that of the overall index, often at the expense of unnecessary risk, and that’s not the outcome you expect for the extra fees you pay your active fund-management team.

It is therefore more important to choose a good multi-manager, a professional team who can implement an effective asset allocation strategy and choose the most appropriate fund managers for each asset class within a robust investment policy framework. A good multi-manager should also be one who has the conviction to stand by their investment philosophy during uncertain and  turbulent investment markets and only make small tactical changes to the investment portfolio where and when necessary.

The benefit of multi-layering asset classes and fund managers reduces risk while still providing inflation beating returns. The so called “free-lunch” referred to by asset managers is the additional returns earned without the additional risk simply by managing asset allocation appropriately.