Rather than building a portfolio from individual funds, some UK investors choose a single "fund of funds" or multi-manager portfolio, which itself invests in a collection of other underlying funds selected and blended by a manager or investment committee. This structure can offer genuine convenience and diversification in a single holding, but it also introduces a distinctive charging structure and a further layer of decision-making that is worth understanding clearly before comparing it with building and managing a portfolio of individual funds directly.
What a fund of funds actually is
A fund of funds does not typically hold individual company shares or bonds directly. Instead, its underlying assets are units in other funds, which might include a mix of equity funds, bond funds, and sometimes alternative asset funds, selected to achieve a particular risk profile or investment objective, such as "cautious", "balanced", or "adventurous". A multi-manager fund is a closely related concept, referring specifically to a fund that deliberately blends funds run by different, often external, fund management groups, rather than exclusively using funds from a single provider's own range.
Fund of funds versus multi-manager: a useful distinction
- Fund of funds is the broader structural term — a fund holding other funds, which may all come from the same provider (sometimes called a "fettered" fund of funds) or from a mix of providers (an "unfettered" fund of funds).
- Multi-manager specifically emphasises the deliberate use of multiple different fund managers, often from competing firms, based on the idea that blending genuinely different investment approaches and specialisms can improve diversification of investment style, not just of underlying assets.
Why investors use fund of funds structures
Simplicity and single-decision diversification
A single fund of funds can provide exposure to dozens of underlying funds and, through them, potentially thousands of individual securities across multiple asset classes and regions, all through one purchase decision and one ongoing holding to monitor, rather than researching, selecting, and rebalancing a portfolio of individual funds directly.
Access to specialist managers
A multi-manager fund can provide exposure to specialist fund managers in areas an individual investor might otherwise find difficult to research and select independently, such as specific regional or sector specialisms, blended together within a single overarching risk-managed structure.
Delegated asset allocation and rebalancing
The fund of funds manager typically takes responsibility for deciding the underlying allocation between asset classes and regions, and for periodically rebalancing that allocation, which some investors prefer to delegate rather than manage themselves.
The layered charging structure
The most important structural feature to understand about a fund of funds is that costs are frequently incurred at two levels: the fee charged by the fund of funds manager for selecting and blending underlying funds and managing the overall structure, and the separate ongoing charges of each of the underlying funds it invests in.
How this can compound
Suppose a fund of funds charges an ongoing charges figure of 0.75% at its own level, and its underlying funds carry an average ongoing charge of 0.60%. Depending on how the fund of funds structure and its regulatory disclosure work, the investor's true combined cost of ownership can approach or exceed 1.3% a year in aggregate, even though neither individual figure looks especially high viewed in isolation. UK regulatory disclosure rules generally require a fund of funds to publish a combined ongoing charges figure that reflects both layers, but it remains worth checking this figure carefully and understanding that it typically represents two distinct fee layers rather than a single management charge.
Why this matters for long-term compounding
As with any ongoing charge, a layered cost structure compounds over time, meaning even a seemingly modest additional annual cost, sustained over a long holding period, can meaningfully affect the final value of an investment compared with a lower-cost alternative achieving a similar underlying return before costs.
A worked example
Suppose an investor holds £50,000 in a fund of funds with a combined ongoing charges figure of 1.3% a year, compared with a hypothetical alternative of building a similar diversified portfolio directly using a small number of low-cost index funds with a blended ongoing charge of around 0.15% a year. Assuming, purely for illustration, that both portfolios achieve an identical 5% annual return before costs over a 20-year period, the difference in charges compounding over two decades could amount to many thousands of pounds in the final portfolio value, purely as a function of the cost difference rather than any difference in underlying investment performance. This example uses hypothetical, simplified figures for illustration only, and is not a comparison of any specific named product, nor a suggestion that either approach is superior — it illustrates why understanding the layered cost structure matters, not which structure delivers a better outcome, since actual underlying performance, not assumed to be identical in reality, is what ultimately determines results.
Comparing structures
| Feature | Fund of funds / multi-manager | Self-built portfolio of individual funds |
|---|---|---|
| Number of holdings to manage directly | One | Several to many |
| Asset allocation decisions | Delegated to the fund of funds manager | Made directly by the investor (or their adviser) |
| Typical cost structure | Two layers of charges, requiring careful reading of the combined figure | Single layer of charges per fund held |
| Rebalancing | Handled automatically within the fund | Requires the investor's own ongoing attention |
| Transparency of underlying holdings | Visible via fund of funds fact sheet, but with an extra layer to look through | Directly visible per fund held |
Points worth checking before investing
- Look specifically for the combined ongoing charges figure, which should reflect both the fund of funds' own charge and the underlying funds' charges together.
- Check whether the fund is "fettered" (using only funds from the same provider) or "unfettered" (able to select funds from any provider), since this affects how independently underlying fund selection is made.
- Review the underlying fund holdings listed in the fact sheet to understand the actual asset allocation and regional exposure being delivered.
- Consider how frequently the underlying fund selection and allocation are reviewed and changed, since some fund of funds structures are more static than others.
- Compare the combined cost against the cost of assembling a broadly similar allocation independently, to understand what is being paid for the convenience of delegation.
Active versus passive underlying funds within a fund of funds
A further distinction worth understanding is that a fund of funds can be built from actively managed underlying funds, from passive index-tracking underlying funds, or from a blend of both. A fund of funds constructed entirely from low-cost index trackers, sometimes marketed as a "passive multi-asset" fund, will generally carry a noticeably lower combined ongoing charges figure than one built from actively managed underlying funds, since it removes one of the two potential layers of active management cost while retaining the convenience of delegated asset allocation and automatic rebalancing. This distinction is separate from the fettered versus unfettered question discussed above, and a fund of funds can combine any mix of these characteristics, so it is worth checking both dimensions — how the underlying funds are selected, and whether they are actively managed or passively tracking an index — when comparing options.
Where fund of funds structures commonly appear
Fund of funds and multi-manager structures are particularly common within workplace pension default arrangements and within packaged "ready-made" portfolio ranges offered by platforms and wealth managers, often labelled by risk level such as "cautious", "balanced", or "adventurous". They are also a long-established category within actively managed retail fund ranges aimed at investors who prefer a single diversified holding rather than assembling a portfolio themselves. Their prevalence in workplace pensions in particular means many UK investors hold a fund of funds structure without necessarily having made an active, deliberate choice to do so, which makes understanding the underlying cost and allocation structure especially useful.
Fund of funds and UK tax wrappers
A fund of funds is held and taxed in the same way as any other single fund from a UK tax perspective — the layering of underlying funds within it does not create any additional tax complexity for the investor, since only the investor's own holding in the top-level fund of funds is relevant for their personal tax position. Held within a Stocks and Shares ISA (within the £20,000 combined annual allowance for 2025/26) or a SIPP (within the £60,000 pension annual allowance, or 100% of earnings if lower), income and gains are sheltered from UK tax in the usual way. Held outside a wrapper, distributions are taxed as dividend or interest income depending on the fund's asset mix, subject to the relevant allowances, and gains on disposal are subject to capital gains tax rules, including the £3,000 annual exempt amount for 2025/26. The rebalancing that happens inside the fund of funds, between its own underlying holdings, does not itself trigger a personal tax event for the investor, since it occurs within the fund rather than through a disposal by the investor directly — only the investor's own eventual sale of their units in the fund of funds is relevant for their personal capital gains position.
Key takeaways
- A fund of funds invests in other funds rather than holding individual securities directly, offering diversification and delegated asset allocation through a single holding.
- Multi-manager funds specifically blend funds from different management groups, aiming to diversify investment style as well as underlying assets.
- Costs are typically incurred at two layers — the fund of funds' own charge and the underlying funds' charges — and checking the combined ongoing charges figure is essential.
- Layered charges compound over time in the same way as any other ongoing cost, and even modest additional annual charges can meaningfully affect long-term outcomes.
- Fund of funds structures are common in workplace pension defaults and ready-made portfolio ranges, often without investors making an active, separate choice to hold them.
- Comparing the combined cost and underlying holdings against a self-built alternative helps clarify exactly what is being paid for in return for the convenience of delegation.