Many pension funds have chosen manager of managers to reduce volatility. Private investors can also use this model for long-term peace of mind
Increasingly, advisers are looking at manager of managers as a way of reducing volatility for clients' pension arrangements and other longer-term investments. It is possible to buy individual funds but you can also form an alliance with a provider.
Intermediaries working with a provider need to be convinced that manager of managers is the best investment structure to achieve predictable, low volatility returns have a range of choices in the way they access this process. Where they forge an alliance they need to be confident that the provider has a well-articulated manager selection process and can track every trade the underlying managers make to ensure their style diversification overlay remains intact.
The two largest providers of manager of managers - SEI and Russell - have taken a very different approach to the UK retail market and both are convinced that they have identified the most efficient route to high net worth clients. SEI is focused on direct relationships with advisers and eschews the life office link. Russell is committed to life office links and does not believe its resources are best spent on direct adviser relations.
Teresa Smith, business development director for the Wealth Channel at SEI, describes how these adviser relationships work. 'The relationship SEI builds with advisers is a business partnership but this does not involve a formal contract, other than the usual terms of business agreement. We look to get to know the adviser's business, their objectives and their areas of pain and try to understand how they intend to use SEI investment solutions in their client portfolios.' As part of this relationship SEI provides training, communication support and transition of client assets, among other services. 'The adviser remains very firmly in control of the client relationship,' Smith stresses.
SEI is a more recent entrant to the UK market although it has a similar 30-year global track record to Russell. SEI believes its products will suit advisers who are keen to construct detailed financial plans and make considered asset allocation decisions for clients. In this respect the UK distribution strategy is similar to its US model where SEI has forged business alliances with thousands of financial advisers.
Al West, founder, chairman, and chief executive officer of SEI's worldwide operations, said: 'Good advisers want to spend time with clients so they can really understand their personal and financial requirements and translate these into a viable plan. We offer a business solution that enables them to do just that.' In the UK the company offers a range of Dublin-based Oeics, UK domiciled unit trusts and model portfolios.
As a broad guide the minimum investment is £25,000 for the unit trusts and £100,000 for the Oeics and model portfolios. These minimums can be achieved through a combination of investments held in different accounts and wrappers such as pensions, for example. SEI has an overall maximum total expense ratio (TER) of 2% that includes 0.6%-1% adviser remuneration. The TER on SEI's balanced fund is 1.84%.
So far the company has reached an agreement with 30 firms of advisers, including the current and several past-presidents of the Institute of Financial Planning (IFP). The SEI service covers record keeping, online valuations, and transfers of in-specie holdings. 'We are moving slowly and patiently because we are here for the long-term. What we want to provide is asset management solutions via top advisers,' West says.
The philosophy behind the top manager of managers funds is absolute control over asset allocation and style. SEI's research demonstrates that returns are largely determined by asset allocation and style - not skill. West is critical of the poor style control he perceives in many managers. 'Some try to stick to a single style, which means they can only get it right during part of the market cycle. Others roam between styles in reaction to market trends. This is very undisciplined and the results are unpredictable.' In contrast SEI blends managers with different investment styles. 'By combining the best growth, value, large cap [defined here as £1bn-plus market capitalisation] and small cap managers [under £1bn] within a given mandate we achieve style diversification, reducing risk with the prospect for added value through stock picking skills.' Out of the 18,000 or so managers available, less than 100 make it through SEI's quantitative and qualitative screening processes.
The fund manager who signs an SEI contract must be prepared to disclose each and every move. 'We insist managers remain focused on their area of expertise, no matter what is going on in the markets. We check every trade every day to make sure they are sticking to the knitting. This way we can see exactly why they get their results and we can separate luck from skill. Any manager who drifts away from style is replaced.'
Peter Hugh-Smith, Russell's director of partnerships and distribution alliances, says the company wants to stick to its traditional strengths and that this objective is best met by forging strategic partnerships with product providers. For UK clients the main partners are Scottish Widows for onshore business and Lombard International ' the Luxembourg-based insurance company ' for offshore business. 'We don't have the resources to work directly with advisers and prefer to work with providers that already have a strong IFA relationship,' he said.
Through Scottish Widows Russell offers four portfolio unit trusts. The total expense ratio on these funds is 2% ' less for the pension products ' and this covers all the costs for Scottish Widows, Russell itself and the underlying managers.
The other main multi-managers may well consider diversifying their distribution opportunities in due course. Northern Trust, for example, already has a relationship with Scottish Equitable and is close to announcing its own links with private wealth managers. Tony Earnshaw heads up Northern Trust and is also chairman of the Association for Institutional Multi Manager Investing group (AIMMI). 'By the end of the year we intend to have partners in all segments of the retail market from the very wealthy and the mass affluent to the mass market,' he says.
manager of managers: worlds apart from fund of funds
• Multi-manager funds aim to control volatility and reduce risk through a combination of different assets, managers and styles. However the term ˜multi-manager' is confusing as it can equally be applied to a fund of funds and manager of managers.
• The added value the fund of funds manager provides is access to a wide range of pre-selected, highly rated retail funds via one investment vehicle. The fund of funds provider monitors the performance, replacing funds where appropriate. The provider's charge for the selection service might add another 0.6%-0.75% to the annual charges the client would pay on the underlying funds.
• Manager of managers is a portfolio of retail and institutional managers rather than funds. The provider appoints managers directly and therefore has total control over the asset allocation and the investment style. The more sophisticated providers track every trade and in this way can monitor exactly what each manager is buying and selling. This is a vital point - as is the provider's size and scale of operations, which determine the scope of manager research and the bulk purchasing powers that reduces charges.
• The added value of the manager of managers lies in its ability to select specialist institutional managers with superior stock picking abilities within a closely defined and monitored mandate. Many of these managers would not otherwise be available to private investors. Equally important is the swift deselection process - an essential component for long-term consistency of performance. Cost-wise there is little difference between a fund of funds and a manager of manager fund and in some cases the latter route can be cheaper.
Source: Investment Week
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