Each month in an exclusive survey with Incisive Research, RealAdviser canvasses a broad panel of advisers on a wide range of different topics. This month we ask our advisers how they view multi-manager products. A big success in the US and Australia, multi-manager has found the going harder in the UK but has survived issues such as the recent bear market and criticisms over pricing to hit something of a purple patch. We asked our advisers the extent to which their clients are exposed to multi-manager as well as their own preferred product types and how they use them. In addition we investigated how our advisers research multi-manager products and providers and sought their views on the attractions of the sector and what influences their product choice. Provoking the most debate of all was whether or not advisers should always look to outsource the management of their investment business.An article of faith for some advisers and an overpriced, underperforming waste of time for others, multi-manager could never claim to have taken the easy route up the UK financial services ladder. A proven success in both the US and Australia, its journey towards full acceptance on these shores has been delayed by numerous roadblocks that have constantly challenged the product to prove its worth to investors and their advisers.
These roadblocks have taken different forms, whether that be external influences such as increased regulation, the demise of with-profits and the three-year bear market from 2000; or internal issues over pricing and transparency, which providers have arguably brought upon themselves.
Despite the calls for innovation and the claims that multi-manager was the panacea for advisers facing problems with diversification, risk management, compliance and so on, there has been understandable trepidation. It's a bit like asking someone who has been playing draughts for 20 years to throw away the box and buy a chess set. Sure, it's innovative, but the fact is you are paying more money for something that may take years to master and has varying strategies that are by no means straightforward.
Nevertheless, despite all the huffing and puffing from the UK investment scene - not to mention the product's sceptics - the fact remains that not only has the multi-manager car remained on the road, it looks to be picking up speed. Those internal and external challenges have been met head-on and many advisers have reinvented themselves from being selectors of funds to appraisers of multi-manager.
But times continue to change. Having a multi-manager offering is no longer innovative in itself and, while many advisers will be happy to have bought their chess sets, the question now is how many pieces will still be available for the game? Will it be the kings and queens who suffer or will it be the smaller players, the pawns, who mirror the example of one of the game's most gifted players, Bobby Fischer, and end up doing a vanishing act?
This month's RealAdviser Inquiry reveals that advisers' faith in multi-manager products is almost universal with 94% now using it for at least some of their clients. When advisers were asked to cite the main criteria behind recommending a multi-manager offering to clients, past performance of a manager or fund, the choice of funds available and service were all viewed as key.
So how has the multi-manager universe been behaving of late? According to Simon Ellis, managing director of Fidelity International's multi-manager business, the market has been in a strong, upward cycle.
"There really has been a sustained period of growth across all markets," he says. "The prominence of the product has grown not only as an investment solution but also as a valid life and pensions option. Many distributors used to hang their hat with just one provider - nowadays they tend to make use of a number of solutions, reflecting not only the product's success, but the increase in funds and providers."
Jason Britton, a fund manager at T. Bailey Asset Management, agrees with Ellis's view that the industry is growing but is concerned groups may overcomplicate the solution. "The industry has grown at a rapid rate in the past three years," he says.
"But with so many providers, groups have started to try and be as innovative as possible. Case and point has been the growth of non-Ucits retail schemes (Nurs), which are arguably being used too much. While some see it as being complex, the beauty of fund of funds is the simplicity and transparency it offers, thus making it easier for advisers to explain what they are investing in."
Advisers appear to recognise the long-term value of multi-manager, with 72% of those surveyed stating they use it as a core holding, 45% for long-term saving and 42% as a pension product. According to the panel, Isas and Peps were the most popular choice for putting clients into the products, with 74% approving of that avenue.
Britton believes one of the biggest multi-manager success stories in recent times has been the explosion of the Cautious Managed sector. "It has been the biggest sector without doubt," he says. "The demise of with-profits has allowed the industry to step in and offer a valid, sustainable product with access to property and bonds."
Our advisers were also asked to highlight what makes multi-manager so appealing in comparison with traditional single-strategy funds. Here, the research and the monitoring power of multi-manager were seen as the biggest benefits, followed by the access granted to leading fund managers and the improved diversification possibilities.
"There is now an increased focus on the quality of a group's investment management team and the scale of the provider," says Fidelity's Ellis. "Advisers will increasingly look at how capable a group's fund management team is at monitoring markets close to home while also focusing on broader asset classes."
Despite the numbers it has, on the whole, managed to return, one of the biggest banes for multi-manager has been the issue of cost - with the argument that additional charges are offset by improved performance now all too familiar to most advisers. Although there are still those who seek to make the most of 'double-charging', the majority of providers have revamped their offerings to make them more competitive on cost with their single-strategy counterparts.
"The question of charging will always be an issue with regard to multi-manager - and rightly so as advisers will look for good value in an industry that is relatively immature," says Ellis. "The way forward is for the big players to set an example by ensuring performance more than exceeds the fee and there may even be an argument for capping the fee to offer comfort on value."
According to Rob Burdett, co-head of multi-manager at Credit Suisse, cost is becoming less and less of an issue: "It is waning away to the point where it's barely mentioned," he says. "We are judged net of fees and, from day one, performance has spoken for itself."
Burdett also believes multi-manager has completed its transition to the mainstream. "You've only got to look at recent events to see how big it has become," he continues. "Fidelity has gone large on this, while HSBC and Skandia are ramping up their fund offerings as well. Some advisers may use it for a small part of their business, others for a bigger slice - and some rely on it for all their business."
Although innovation is now seen as the name of the game, it appears our advisers still view the more traditional products as the most attractive on the market, with fund of funds (Fofs) and manager of managers (Moms) respectively recommended by 77% and 59%. The next favourites, with 25%, were the Nurs and multi-asset portfolios - comparatively new offerings that include less mainstream products to optimise diversification.
Mark Pearson, head of investment marketing at Aegon Scottish Equitable in conjunction with Northern Trust, believes that, while multi-asset portfolios are here to stay, they require managers with "a massive skill set" - and this comes at a premium.
"While the attraction of working with less correlated asset classes such as private equity, hedge funds and commodities is obvious, the fact is you have got to be clued up on them as well as traditional equities and bonds," he says.
"With a wider palette available for painting a picture, advisers need to know that not every manager is going to be able to spot every trend in different markets. For example, there may be a time when private equity and property become correlated, and it will be that manager's job to see that on the horizon. That is not easy to do, especially when you consider the asset allocation decisions involved."
Pearson also acknowledges that Fofs have outperformed Moms in recent years. "The premise of Mom is that it is institutional and cheaper than Fofs, with no charging issues," he says. "With markets the way they have been over the past two or three years, Moms have had to stay neutral on asset allocation and rely on manager blending. On the other hand, Fofs have had more freedom to make bets and take advantage of asset allocation flexibility."
RealAdviser's panel were asked to point out who they thought were the market leaders in multi-manager. On the Fof side, Jupiter was the most popular group, gaining 34% of the votes, followed by Credit Suisse with 13%. On the Mom side, Skandia was top dog with 26%.
As one would expect with a booming market, the size and range of new entrants over the past few years have been considerable, with a number of boutiques in particular coming to prominence alongside larger competitors. One of the biggest aids to multi-manager has been its growth in conjunction with wraps, fund supermarkets and other platforms - all of which have offered providers a different conduit through which to sell their products.
Cofunds (with 34%) and FundsNetwork (22%) were the most popular choices when it came to fund supermarkets. This is interesting as our advisers also most valued the input of third-party sources, such as platforms, when researching multi-manager products and providers - closely followed by a provider's own website.
"As an industry, we are happy to be on as many platforms as possible," says Britton at T. Bailey. "It helps both us and the adviser to gain a broad access to funds and, administratively, it's fairly easy to get on these lists."
With all the new entrants, not to mention the growth in 'shop windows', some commentators now argue the multi-manager market is close to saturation point. These voices grew loudest in spring 2005, when Credit Suisse bought the Artemis Fofs range, and the possibility of a consolidation period was widely mooted. Some 18 months later, however, this looks to have been unfounded.
Ellis believes the reasons for this are twofold: "You have to look at the growth of the industry," he says. "Mutual funds have been growing at some 5%, while multi-manager has been growing at some 17% to 18%, thereby making it a perfect investment for providers for commercial reasons.
"Then there is the argument that the market is still fairly immature, with barriers to entry still low in comparison to, say, funds of hedge funds. In truth there are few issues in relation to scale within the whole multi-manager solution yet."
Nevertheless, Ellis maintains an old business adage will come to the fore in the end. "The theory that 80% of profits will go to 20% of providers has to happen," he says. "It is one of the laws of business with consolidation part of any lifecycle. While there is no queue of people for the exit door yet, as the market is appealing, a consolidation period is almost inevitable."
Burdett agrees, saying: "At the moment no-one can deny just how promising the market really is. Boutiques remain strong, while the bigger houses will always have the scale to underpin their offerings. Maybe it will be those in the middle who will be the first to suffer but you would have to assume there will be some sort of consolidation down the line."
Despite being on the investment scene for a number of years, it appears the opening phase for a number of multi-manager providers has still to come to an end. With some predicting consolidation in the not-too-distant future, the fact remains business is on a strong upward trajectory and, as long as that remains, the industry should expect more entrants to the market.
As such, the worry for now is not the dearth of inflows into the multi-manager sector but the abundance of investment options. It is this that has acted as a catalyst for some providers to focus on innovation rather than reliability, as they try to build industry scale quickly - ironically leading to a spate of 'me too' offerings. The questions facing the sector are how long it will be before the industry actually does reach saturation point - and which pieces are left standing when the chess game reaches its second phase.
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