MANAGER of managers? Multi-manager? Fund of funds? They are three interchangeable concepts that retail investors are going hear a lot more often in future. For simplicity, we refer to fund of funds.

Fund of funds’ share of the fund market will grow by between 16 and 30 per cent by 2008, according to recent research, a growth rate supported by separate independent research from asset management consultancy Cerulli Associates. CA is also predicting substantial growth in fund of funds investment in the UK – 11 per cent a year till at least 2007.

The popularity of fund of funds is easy to explain and the logic is compelling. They have at their heart both the premise that no single manager can be all things to all investors, and a carefully selected fund of funds is capable of reducing investment risk.

Instead of placing money in just one fund, fund of funds offer to create security and/or returns for investors by diversifying across a wide range of funds and managers, the guiding principle being that by pooling client money, the manager can spread risk for individual investors while simultaneously allowing them access to (and hopefully returns from) a far greater range of funds than they would have being able to access alone.

Fund of funds exist to suit investors across the risk threshold. Investors need to sit down with their independent financial advisers to select a fund of funds matched to their own risk assessment.

Fund of funds’ increase in popularity among investment houses and consumers has been hastened by the recent bear market and more players are entering the market.

Credit Suisse Asset Management has been offering multi-manager funds for two years and New Star Investment Management last week bought Edinburgh Fund Managers, in part at least for its fund of funds operation, headed by Mark Harris.

And it is not just the asset management companies who are flocking to launch fund of funds products. IFA groups, such as Hargreaves Lansdown and Aitchson & Colgrave, also entered the fray in the last year. Indeed, some commentators are now warning there is a danger too many of these products are coming on to the market, in much the same way that the market was swamped by tech funds at the end of the 1990s.

Jason Hollands, head of strategy at Edinburgh-based ISIS Asset Management, believes the market will not be able to sustain all the new entrants.

He said: “Critical mass is key. Established players with scale are in pole position to negotiate better charges for their clients.” ISIS has offered fund of funds products since the Eighties.

The subject of charges remains a contentious one. The FSA has in the past been critical of the “multi-layering”, which see investors hit by management fees for each of the funds held with in a fund of funds bundle, not just one for the manager of their chosen fund of funds. However, the industry counters that, by pooling the resources of multiple clients, they are able to exact lower charges from the managers with whom they place money. In reality, in some cases there is very little difference in the overall fee charged to investors.

Monitoring is key to the fund of funds concept. Frank Russell and Psolve, part of the South African-based financial services giant Sanlam, are two companies which monitor individual funds, alerting fund of funds managers to changes in fund performance and personnel.

Credit Suisse estimated that 68 per cent of UK-authorised funds changed manager in 2002. Frank Russell monitors more than 1,700 investment managers and more than 6,000 investment products globally, each year.

A spokesman said: “Many changes can occur in funds and investors aren’t always aware of them. A manager may leave a firm, or a manager might alter their investment style unexpectedly. For these reasons, Frank Russell continuously monitors its managers to make sure they stick to their assignment, replacing them if necessary. This way, investments stay on track with client goals.”

It is an open secret among advisers that a “realisation curve” exists. This illustrates the lag between when institutional money moves on and when retail investors shift funds. It is considerable and works at all points in the cycle. Institutional money has most often taken the decision whether to stick with or exit a fund before the exiting fund manager has even left the building, whereas even the most proactive of individual investors will have to wait for the news to break in the press before deciding whether to move their money.

The origin of these funds lies in the institutional sector, where for years pension fund trustees amongst others have relied on specialist monitoring groups to track fund performance relative to peers and manager changes, acting swiftly to remove mandates when performance or strategies change. The introduction of fund of funds has simply brought this sophisticated monitoring into the private investor arena.