The Benefits of Direct Investment Strategies vs Mutual Fund Approaches

In the world of wealth management, discretionary investment managers often run direct and mutual fund investment strategies. While clients may have a choice between the two, typically direct strategies are positioned as more sophisticated and reserved for wealthier clients. Both approaches offer professional and active management, but direct portfolios can provide distinct advantages which we explore below.

Understanding the Difference

A direct portfolio involves investing directly in individual assets such as stocks, bonds, or other securities. The portfolio is actively managed by an investment manager, who has discretion over the investment decisions.

In contrast, in a mutual fund portfolio the investment manager expresses their market views and positioning by selecting a variety of mutual funds. These mutual funds, in turn, invest in a range of securities.

The Four Key Benefits of Direct Investment Strategies

1. Transparency

Direct portfolios offer clear visibility into exactly what is in the portfolio, giving clients a detailed understanding of their investments. Unlike mutual fund strategies, where the underlying assets are often less visible, direct portfolios provide full transparency, allowing investors to see the individual assets and make more informed decisions based on their performance.

2. Cost Efficiencies

One of the main advantages of direct portfolios is cost efficiency. In mutual fund strategies, investors are subject to multiple layers of management fees; one for the investment manager, another for the various underlying fund managers, as well as fund administrative and trading costs. These additional fees can erode long-term returns. Direct portfolios eliminate these intermediary fees, reducing overall costs and allowing for more efficient capital deployment, which can significantly enhance investment returns over time.

3. No Over-Diversification/Duplication

Over-diversification is an issue with mutual fund strategies. Because these portfolios invest in multiple funds, they typically end up holding hundreds, if not thousands of positions, and inadvertently duplicate assets across different funds, diluting the potential for returns. Direct portfolios provide a more focused approach, ensuring that clients are not overexposed to any single asset while avoiding unnecessary duplication and excessive diversification within the portfolio. This leads to a more optimized portfolio that can better reflect the client’s risk preferences and return objectives.

4. Enhanced Control and Flexibility

Another advantage of direct strategies is the ability for the investment manager to respond efficiently to market conditions. With complete control over the portfolio, they can swiftly adjust to take advantage of emerging opportunities or mitigate risks as they arise. In contrast, a mutual fund portfolio involves multiple layers of decision-making. The investment manager has no control over the decisions made by the underlying fund managers, which may result in slower responses to changing market conditions or conflicting market views.

Our Approach to Direct Investment Strategies

At Sigma Private Office, we recognise the benefits of direct investment strategies. Our active, high-conviction direct investment strategies focus on holding high-quality assets to maximise the effects of compounding growth and generate alpha for our clients, moving beyond passive ETF-based or mutual fund solutions.

This approach aligns with our core investment principles of prioritising time in the market over attempting to time the market, acknowledging that staying invested through market cycles is crucial for long-term wealth accumulation.

The unique advantage of our Sigma Alpha strategy is that it brings these benefits to a broader audience, making high-quality direct investment solutions accessible at more competitive entry points.

To learn more about how we can support you in achieving your financial objectives, contact our team by clicking here – Contact Details – Sigma Private Office.