The mutual funds industry contracted during the bear market but the multi-manager market has grown by 16% a year over the past three years
Coming out of the recent three-year bear market, investors have learned to place more weighting on the diversification side of the investment equation than they had previously.
An indication of this trend is the increasing popularity of multi-management. It has grown at 16% a year over the past three years, according to the latest Cerulli Report, while the rest of the mutual fund market has decreased.
Multi-management offers an all-in-one investment solution that combines diversification, active management and risk control in a simple, tax-efficient, cost-saving vehicle. Multi-manager funds bring together the expertise of various asset management houses within one product, under the control of a separate fund manager.
Funds typically aim to deliver consistent relative performance, while carefully balancing risk. In this context, diversification serves to reduce the risks associated with investing in one market or with one fund manager and increases the opportunity to benefit from upturns in different markets around the world.
Three basic variations of multi-management exist: funds of funds, managed portfolios and funds of managers. Each variation begins with the premise that no single fund manager has the expertise to be the best manager in every geographical region and asset class.
In this article, we will compare and contrast each option to determine which might be most appropriate to meet investor needs. First however, let us highlight the benefits that all multi-manager offerings share.
Multi-manager funds, in whatever guise they take, offer significant savings compared with the costs borne by an individual's personally created diversified portfolio.
Multi-managers are able to negotiate dealing terms that are not available to the general public. These attractive terms are important in the initial creation of the portfolio but, perhaps more importantly, also add significant value when switching between assets within the fund. Multi-managers can therefore build and maintain diversified portfolios without standard charges nullifying returns.
Successful multi-managers will have thorough processes in place to research the industry, selecting the most appropriate investments.
The details of this process and the resources devoted to it are far beyond those available to most intermediaries. Most multi-managers evaluate candidates across the industry and hold face-to-face meetings with fund managers. A truly dedicated, independent process should instill the intermediary with confidence when making the multi-manager recommendation to a client.
One of the most attractive benefits of multi-managed funds is that internal transactions are not subject to capital gains tax (CGT). Any actively managed portfolio will involve buying and selling assets from time to time so it maintains the optimal balance to capitalise on changing market conditions.
An individual's portfolio would trigger CGT liabilities with each asset disposal, which not only eats into profits but also demands unwanted administration. Multi-managed funds take both of these unwanted events away from investors because CGT is only applicable on the disposal of the investor's fund holding.
Diversified portfolios are likely to contain five or more funds and each fund and stock requires monitoring and some degree of administration. Keeping track of the paperwork alone is time-consuming. With multi-manager funds, investors receive one concise, detailed report and dividends are retained within the fund until the fund's distribution date.
Multi-manager funds, by nature, have an additional layer of management involved. Each element of the portfolio is run by a specialist fund manager, with a separate manager exercising control over the portfolio as a whole. Therefore, the second layer can ensure that all the underlying managers are acting to achieve set goals and that risk is kept within given parameters.
One of the primary functions of any multi-manager scheme is to reduce risks inherent in an equity portfolio. Diversification is one way to reduce risk but multi-managers can go beyond basic diversification. They can diversify with purpose, which we will explore in further detail later.
So how do multi-manager approaches differ? As the name fund of funds implies, this version is in itself a fund but one that invests in other collective investments, as opposed to investing directly in stocks and shares. The manager will select an array of funds that, by and large, are available to all retail investors. Charges are typically higher than on other investments, as each underlying fund purchase will suffer separate charges, although normally reduced from the standard rates.
Often omitted from multi-manager debates are managed funds. I would argue that they should be included because, if for no other reason, they lead quite naturally to the third option.
Rather than investing in funds, managed funds invest directly in equities and/or bonds. Typically, individuals or teams within the investment provider will manage the assets of each geographical area and asset class, with a lead manager making decisions on asset allocation. Managed funds have relatively low charging structures and can be more finely tailored. However, return to the premise that no fund management company has a monopoly on the best fund management talent across every region and asset class and the potential downfall becomes apparent. Low-cost, yes, but potentially at the expense of performance.
The third, and what we believe to be the most advantageous, option is the funds of managers approach. This is also referred to as funds of mandates or managers of managers and takes the best attributes of the previously discussed versions and combines them in one simple product. Rather than investing in off-the-shelf funds, funds of managers empower some of the best investment talent in the industry to manage made-to-measure portfolios.
Why do we believe the funds of managers approach is the best choice? Funds of managers offer several distinct advantages over the other varieties of multi-management. Some of the benefits are unique; others are merely improvements to the benefits shared by other multi-manager options.
Funds of managers can exploit investment talent that is inaccessible to other multi-manager options or, indeed, any other retail product. Funds of managers can obtain the expertise of institutional and other specialist managers around the world, providing investors with the benefit of a much greater universe of possibilities. For instance, we have the capability to monitor 50,000 funds and fund managers around the world.
Liquidity is not a problem. One of the most important benefits of funds of managers is that they are not limited by the size of investment when constructing portfolios. Many funds of funds will not be able to exploit some funds, no matter how good they are deemed to be, purely because they are too small. Funds of managers do not face this problem as they can simply ask the successful fund manager to run a similar mandate for them, without worrying about size constraints.
By assigning separate elements of the portfolio to separate specialist fund managers, the funds of managers approach has more control in tailoring management styles. Funds of managers can balance the portfolio by awarding mandates to managers with complementary, yet diverse, attributes.
Management nuances can be balanced, allowing finely tuned diversification of such factors as style (growth versus value), size bias, concentration and aggression (low versus high beta, for example).
A good manager of managers will not diversify simply to spread an investment but instead diversify with the purpose of attaining the ideal balance, the optimal portfolio.
When selecting a multi-manager, we believe you should look for a process that enables them to combine talents to attain an ideal balance between risk and potential reward.
We believe a rigorous process should give intermediaries confidence when recommending the funds to clients, as well as providing clients with peace of mind that their investments are working hard for them.
The funds of managers approach allows the intermediary to offer clients an actively managed portfolio of some of the best investment professionals in the world, providing diversification and controlled risk, all within a simple, cost-saving package.
In short, funds of managers provide a complete investment package to help clients meet their long-term financial goals.
Three basic variations of multi-manager exist: funds of funds, managed portfolios and funds of managers.
One of the main functions of any multi-manager scheme is to reduce the risk inherent in the equity portfolio.
Funds of managers can exploit investment talent that is inaccessible to other multi-manager options.
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