An FOF, otherwise known as a multi-manager fund, is a pooled investment vehicle that invests in other portfolios as its underlying holdings, which can be focused on any asset or security.
FOFs usually invest in other mutual funds or hedge funds but Alan Gauld, senior investment director in the abrdn private equity team, thinks the set-up is well placed to invest in funds focused on unlisted assets.
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Gauld said: "By overcoming the traditional barriers to entry, FOFs provide investors of all sizes with diversified access to some of the best performers in private equity.
"They take away selection pressures whilst providing daily liquidity. The underlying exposure importantly lies across hundreds of private companies, well-balanced by strategy, sector, geography, maturity and by underlying PE firm."
Gauld applies this strategy slightly differently in his abrdn Private Equity Opportunities trust, using the closed-ended structure to hold open-ended PE funds and make direct investments into PE stocks.
"PE FOFs are becoming more ‘direct' through making co-investments into private companies, alongside the high-quality PE firms they fund invest with," he said.
"These co-investments are often fee-free to the trusts and therefore can generate higher returns.... Many of the best private equity deals are struck at the bottom of the cycle, during times of volatility and uncertainty, therefore PE FOFs ensure you capture your fair share of these opportunities."
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John Husselbee, head of multi-asset Liontrust, said FOFs provided two main benefits: an ability to help investors meet their investment objectives and "help ensure advisers meet their suitability and Consumer Duty obligations".
He explained that the ability to hold several portfolios within one investment vehicle provided access to a broader range of assets classes, geographies, investment styles and managers, all under one umbrella.
The multi-manager strategy can also be utilised to invest in several closed-ended portfolios within the wrapper of an open-ended fund.
Peter Walls, manager of Unicorn Mastertrust, said the "structural advantage" of a fund-of-trusts was the "primary rationale" for his portfolio, which enables him to justify costs.
Rather than holding "a few ‘starter' trusts", Walls utilised the structure to invest in less liquid assets in areas such as listed private equity trusts, small-cap portfolios and trusts with specialist mandates, while shoring up some of the investment risk attached to those areas.
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The more niche mandates "inevitably carry a greater deal of risk from both a sector and investment manager point of view", Walls said, so he tried to "avoid following the latest fashions too aggressively, while remembering that risk and reward are happy bedfellows".
He highlighted the RTW Biotech Opportunities as a good example from the specialist sector, which he recently added to the Mastertrust.
"It has delivered impressive returns despite a really challenging backdrop for the listed equity market in biotechnology stocks," he said.
Not all managers were bullish about the advantages of FOFs to manage the more volatile macroeconomic backdrop, however.
Dan Higgins, CIO of Marylebone Partners and investment manager of trust Majedie Investments, said the investment landscape had been "transformed" in the past three years, as structurally higher interest rates, coupled with cyclical and geopolitical volatility, had "now set the stage for greater price dispersion between individual investments".
He said under this new macro regime he "questions whether a traditional allocation will safeguard and grow wealth after the effects of inflation".
"This is particularly true for a fund-of-funds, where over-diversification and/or duplication of return streams might result in an expensive and unsatisfactory outcome for investors," he said.
Higgins added: "As the liquidity tide goes out, any investor considering an FOF should be wary of strategies whose historic success has been predicated on conditions of cheap money, low interest rates and generally rising markets."
"Whereas there is considerable merit to a portfolio approach that combines funds, to access differentiated and uncorrelated return sources, it is important to recognise that a new market regime requires a different playbook."