Vince Rennie, chief investment officer at Wintherthur Life UK, tracks the increasing popularity of multi-manager among investors
THERE WAS A time when providers of financial products such as life companies saw themselves as experts in manufacturing, distribution and administration.
In this traditional model the company would have in-house product design, investment management, a direct sales force and huge armies of support and administration staff.
But all that is changing.
Recent developments have seen sales forces replaced by distribution through independent advisers, much of its administration capability outsourced to specialist companies and investment management delegated to external specialists.
Product design, typically the evolution of a tax wrapper, has tended to stay in-house but differentiation between products can be narrow and short-lived.
It is in the area of investment management where some of the most innovative developments have emerged.
The most interesting of these are in the area of multimanager offerings.
Investment management The 'multi-manager' description covers a variety of combinations.
This may be the simple delegation of management in a specific asset class to a single, specialist manager who can supplement an in-house investment capability.
Or it may be a multimanager offering in all asset classes.
This may or may not include an in-house offering but will offer the possibility of combining managers in fund of funds, or manager of managers strategies.
The combinations will be constructed to meet specific objectives by the investor, their own adviser, or the fund provider.
Fund of funds and manager of managers strategies are both based on the premise that no manager can be the best in all asset classes and therefore to use a single manager in a managed fund is likely to involve some mediocre performance in one or more asset classes.
Fund of funds strategies combine managers using the mechanism of existing pooled funds like unit trusts and Oeics.
Usually available in the retail market, fund of funds is managed by a fund manager who provides the asset allocation and the fund manager assessment expertise.
Manager of managers strategies are those which, rather than buying funds, appoint managers directly.
The manager then manages a segregated portfolio according to agreed investment criteria.
In this latter strategy, the manager of managers has a more hands-on role in monitoring the managers in the fund and does so at the individual stock level within each part of the portfolio.
In both strategies the objective is to achieve an enhanced risk/reward profile by blending together the best managers in different asset classes but also managers who have different risk characteristics in their process.
This can mean that there are natural hedges in the portfolio which reduce the overall risk.
Asset allocation Having identified the best managers, the multi-manager in both the fund of funds and manager of managers strategies must then blend them together.
This blending process has typically been where the asset allocator in the multi-manager operation adds value.
Traditionally top-down, tactical asset allocations strategies have been applied to meet the very broad objectives of what have been essentially managed funds.
More recent developments, as illustrated by Winterthur Life's Elite fund of funds range, have introduced more tailored investment objectives, initially by making available more cautious and aggressive strategies alongside the older style balanced managed fund.
This has been supplemented by the addition of sector fund of funds in specific asset classes.
This allows investors and advisers to use combinations of multi-manager funds to achieve a more customised blend.
This process can deliver cost savings and performance benefits over more traditional methods of fund selection.
The approach also continues to provide the risk reduction benefits associated with diversification with regard to individual companies and asset classes but now provides for diversification across managers as well.
The investor and adviser are helped even more with the development of online asset allocation models which allow the adviser to sit with their client and construct combinations of funds to achieve specific objectives, taking into account existing assets, including projected pension benefits, and with-profits investments.
It is likely that this trend of customisation will continue with generic solutions to specific objectives for the mass market, while high net worth investors use more tailored strategies.
This trend will likely be enhanced further with the exploitation of new investment categories allowed under Ucits III.
Mark of quality Multi-manager investment solutions are becoming more popular with investors, due to the increased choice that they have available, and with advisers who are able to share the compliance burden.
Providers have the expertise, systems and controls to carry out and maintain due diligence over managers and their processes.
They are also able to maintain all the documentation necessary to demonstrate adherence to the required standards.
Open architecture offerings provide investors with choice but multi-managers will, in the future, have to demonstrate that they offer a lot more than just a technology platform.
They will have to provide quality assurance over the funds available to allow advisers to feel confident over their recommendations.
Robust manager monitoring systems and predictable asset allocation performance will further enhance the value that multimanagers provide.
Investment advisers tend to split into those with inhouse analytical capabilities who will identify those funds which they are going to recommend and those without who require a high level of compliance support behind their service to clients.
Multi-managers need to be able to provide add-on products and services to those advisers whose own investment expertise makes it an essential part of their value proposition.
This may mean providing customised strategies involving a number of funds some of which may not be a part of the manager's standard offering.
Other advisers may be more comfortable with generic solutions to their clients' requirements.
These advisers and their clients are more likely to be attracted by the robust and compliant processes.
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