So what happens next?
Despite still being in its infancy in comparison with long-only funds, multi-manager is a revolutionary new product not only on a national stage, but also a global one, says Simon Ellis, managing director of multi-manager business at Fidelity International.
He backs his view with the statistic that the growth in global funds of funds is forecast to be 18% a year from 1999 to 2009. "This compares with the standard mutual fund industry, which is growing at 5% a year," he adds. "Meanwhile, I'd argue the insurance industry isn't growing at all."
While multi-manager has been successful in the UK, it is actually growing at a slower rate than some of its European counterparts. According to Ellis, this is because customers on the continent pushed major banks to implement open architecture as opposed to just offering their own products.
"Another reason for multi-manager's global growth is its ability to solve business as well as investment problems," he continues. "In a world where litigation and regulation have come to the fore, it offers large banks and direct salesforces a list of four or five funds they can look at and say these do the job for each customer."
Ellis sees multi-manager as beginning to reach early maturity, with early players such as Lazards and Rothschild now replaced by big groups who have brand, distribution and influence. "Most importantly, they have realised multi-manager will be a success story and are looking to do all they can to win," he adds. "How they do this will be down to products and innovation. Till now, multi-manager has been used as an alternative product to managed funds and a default option to portfolio-planning tools. However, we're now seeing multi-manager pass through the product stage and appear as a solution - for defined contribution lifestyle pensions, target funds and in defined benefit too, where people now want more asset classes."
Ironically, with more than 200 multi-manager vehicles now on offer, advisers find themselves having to choose between multi-manager funds. "Clients don't really care about the debate between fund of funds and manager of manager and providers and advisers shouldn't care either," says Ellis.
"Manager of manager can't buy the best managers, such as Anthony Bolton, as they don't want to run these mandates while, by the same token, funds of funds isolate themselves from managers who only want to run mandates. "In the end, the debate will no longer matter as hybrids become more prominent, mixing funds and mandates to get the best type of portfolio.
"Multi-manager has come a long way. It started out as a place for wealthy individuals and quickly became mass-market to consolidate poorly run portfolios. Now it's being used across the spectrum of clients, who want performance and value for money. Whether its practitioners want risk mitigation or aggressive asset allocation, multi-manager is not just here to stay - it's here to grow very quickly."
A new landscape
With 115 groups in the multi-manager industry and 78 in the fund of funds sector, the market is bound to see some consolidation in the long term. That is the view of Robert Burdett, director and joint head of multi-manager services at Credit Suisse, who underlines the point by saying he only had three competitors when he started out at Rothschild back in 1995.
"This consolidation will not happen immediately because of the constant growth in the market year-on-year," he continues. "However, when it does happen, the market will become more visible than the traditional 20 or so providers people are currently aware of."
This new terrain will also bring a number of new forces into the market, Burdett predicts. "Life companies will follow Skandia's lead as they look to regain some of the value chain, while fund supermarkets will look to offer a managed option for clients in the future," he adds. "Other entrants will be large banks, which will look at the examples of both HSBC and the model that has been formed in continental Europe, while advisers will also look to get involved by designing their own funds.
"The effect of these new entrants will be offset by an increasing number of offerings retiring from the market as existing multi-managers merge, some simply fall by the wayside and consolidators such as life companies come in with scale and expertise."
In this climate, multi-manager is evolving to become even more accessible to advisers and Burdett continues: "Despite markets all rising from March 2003 to 2006, of all the 3,600 UK, Luxembourg and Dublin-domiciled funds, only 10.6% outperformed in each of these three years. This means 90% of clients must have been upset by the performance of their fund in one of those three years."
He also points to a survey by Feri Fund Buyers, which found that people see manager experience and investment approach as the most important factors in selecting a fund, outstripping performance over certain periods. "These are, however, possibly the hardest things for advisers to research as managers change jobs so regularly," Burdett adds. "Between 1996 and 2003, 45% of fund managers left the industry and never came back and, with this talent drain, it's no surprise that two-thirds of the top 50 companies have no funds where managers have been there 10 years while a quarter have no funds where managers have been in place for five."
Another key influence on the future of multi-manager, says Burdett, will be Nurs and Ucits III. "While they may offer access to more asset classes, it also means much more research into what the fund does and is actually investing in," he explains. "Nevertheless, while the multi-manager landscape looks set to evolve completely over the next few years, changes in the market and an increasing need for maintenance make outsourcing an ideal solution to finding consistent outperformance."
Taking the prudent route
Perhaps somewhat provocatively, in light ofthe views of Peter Lawery of Jupiter (right), Skandia Investment Management's sales and marketing director Spike Hughes suggests asset allocation is the easiest way to destroy wealth. "In a world where the average investor's primary goal is not to lose money, stock selection is the prudent route as there is more room for upside while more external factors are under control," he argues.
With markets enduring the full set of bull, bear and stable periods throughout the past decade, Hughes points to the FTSE All-Share to illustrate the benefits of good stock selection. For example, during the bear market from March 2000 to 2003, the index was down 42% but the top ten stocks were up 245%. "This phenomenon was not just a result of small dotcom and biotech companies either as the top ten FTSE 100 companies where up 122% in that period," he adds.
By contrast, Hughes contends asset allocation is much harder to judge as sector and regional returns are far more erratic. "The best-performing market in 2005 was Japan, but this year it's nowhere with an increase of just 2% to date," he says. "Knowing this, would an investor really want their pension fund to be dependant on when the next earthquake in Japan will be?"
With so many groups operating in the same market, innovation becomes an ever greater necessity in order to move forward. "Skandia Investment Management has done this before, challenging the fund of fund and manager of manager debate by introducing a hybrid of both retail and institutional managers into one fund and, with the launch of its Global and UK Best Ideas funds, it is doing so again," says Hughes.
The funds adhere to the idea that stock-picking is key by using the ten ideas that "really excite" each of the 10 fund managers in their respective portfolios. "This offers a diversified portfolio across styles and markets but with all managers working with an absolute return focus," says Hughes. "This takes away the question of whether Japan will beat Europe as all 10 stocks are designed to make money from the entire stock universe."
After the Global version took some £170m in its first four months, Skandia Investment Management's research into the market indicated advisers were still keen to drive asset allocation and that there was strong demand for a UK version to drive equity exposure.
"Investors have been faced with two broad categories of multi-manager in the past few years," says Hughes. Those with a huge emphasis on risk management, restricting the upside, and big-betting risk-takers who have their whole portfolio into Japan or emerging markets, which has a strong upside but can be too risky. Skandia Investment Management is trying to make these big bets through stock selection yet negate risk by diversifying across the best ideas of a number of very talented managers."
A platform for change
Ian Thomas, investment marketing manager at Skandia, sees three main advice models in the UK at present. They are product-led advice, holistic financial planning - akin to the model prevalent in Australia - and the mixed business model, which operates on the individual client level or has different RIs in the same firm pooling expertise.
"The advisory business model in the UK is slowly transforming as it adopts some of the principles of its US and Australian counterparts in a move to a financial planning model that focuses on managing client wealth in its entirety as opposed to sales opportunities," says Thomas.
He points to a recent survey on how Australian financial planners spend their time, which shows that 60% of an adviser's time is spent on advice and planning, 22% on administration and compliance and 18% on promoting and developing new business.
"This is much more of a reflection of how a financial planner should spend their time," says Thomas. "But how does this process take place? According to research carried out by Skandia, advisers are keen to centre their work around communicating the value of financial planning, segmenting the client base and working out what goes along with each one of those segments. The key is to ensure each client is making you money while getting value for money from the service you're offering."
Thomas argues platforms can play an intrinsic role in this evolution by increasing the efficiency of a business and allowing advisers more time to talk to clients face-to-face. "Some 90% of Skandia's valuation requests are now done online, while online switching approaches 60%," he says. "Selestia, whose platform is set to combine with Skandia next year, has 75% of its business transacted online."
Transparency is also vital as providers shouldn't be determining or dictating the terms an adviser takes. "Instead we should be looking at product-neutral charging with no smoke and mirrors on different products," Thomas adds.
Compliance can also be used to build a competitive advantage in Thomas's eyes. "Financial planning is more of an art than a process so you should never expect the same answer," he says. "Nonetheless, there needs to be a process within a business and platforms can be key to that.
"With our new platform set to launch in 2007, the hope is it will offer a process for advisers to take clients through risk-profiling, asset allocation, fund selection and post-sale reporting with a client relationship management system at the heart of it all. This means everything done from quote to application is saved against that client record on the system."
Adviser business models are evolving at a rapid pace and platforms - and the efficiency they can offer - could be key in deciding how long and how successful the change is, says Thomas, adding: "Platforms are not causing the change, they are enabling it."
The evolution of wrap
While many in the UK are aspiring to form a complete wrap model, says Arthur Naoumidis, group managing director of Praemium UK, that would not actually be the end game but rather just a part of the evolution of the managed investment arena.
Naoumidis argues that, as with the US and Australia, the next stage in wrap evolution in the UK will be the inception and growth of separately managed accounts - or 'SMAs'. "These accounts tend to address a number of problems advisers are faced with from Wrap providers, such as cost and transparency," he adds.
Charges for a wrap in both the UK and Australia are typically 1.5% - 0.6% platform charge and 0.9% for annual management charge - before adviser trail commission. "However, SMAs offer a more efficient model by offering only 0.5% for the annual management charge, thus lowering the price for using the wrap to 1.1%," says Naoumidis.
"This is because, although it is the same structure, instead of buying units in managed funds, you can make use of improved technology to ensure the investor only buys the underlying assets. You're only buying a manager's intellect - their stock choices - as you don't want the registry expertise or back-office systems."
That 0.4% need not necessarily be completely passed back to the client. "The adviser networks may take the fee while they create a profitable business model from advisers only paying a franchise fee," Naoumidis explains. "SMAs have a brandable structure that networks can create a legal umbrella around, which means networks can charge 0.2% for negotiating the funds that appear."
Naoumidis believes in the Australian sales argument of a "pay less, get more" structure. "Aside from cost, SMAs offer a real see-through ownership, similar to Sipps in the UK," he says. "Indeed, the Australian market now offers self-managed super funds, which are the biggest growth area in the country. These allow clients to take charge of their retirement and know exactly what's going on with their money in an SMA."
So are there problems with the model? "Providing an adviser uses the right legal umbrella, which in the UK is a collective investment scheme - meaning financial planners can sell it without a licence upgrade - the only issue would be fund managers being unwilling to disclose their funds to people," says Naoumidis.
"This can be counteracted as fund managers tend to live in a vacuum and need money - money advisers control. This means advisers can go to these managers and ask to use their fund in the cheaper SMA structure and, if they refuse to lower the charge for only using their stock selection, an adviser can simply go elsewhere."
Naoumidis is convinced this model will transfer itself into the UK market. "The sales argument - combined with professional advice, better after-tax returns and a more personalised feel - makes it the logical step for managed accounts going forward," he concludes.
In search of the perfect platform
Charges, regulation, commission issues, a lack of investment into adviser companies, problems with business valuations and falling margins - all these factors are precipitating the evolution of platforms into the retirement space, according to Simon Burgess, head of FundsNetwork sales, FundsNetwork.
"With life companies under pressure as margins fail, many have accepted a number of big bets have to be made and many are launching their own wraps as a means to protect their businesses," he says. "Indeed, with proliferation of platforms the norm for mutual funds, life and pensions groups have every right to be worried enough to change their business models.
"One of the biggest drivers of this growth into the retirement space is the fact that 75% of people aged over 55 and yet to retire don't actually have a clue how much they're going to draw down from their savings in retirement and most of them will actually run out of money before they die."
Since A-Day, Burgess continues, there has been an obvious need for a clear and transparent wrapper for life and pensions. "The aim is to do for retirement what has happened to investment - making it both clean and accessible," he says. "This process is only part of forming the perfect platform, someone no-one has achieved yet."
FundsNetwork tends to leverage much of its knowledge from its US counterparts, as the US version of FundsNetwork is seen as a retirement - as opposed to mutual funds - provider, with 60% of inflows coming into retirement programmes.
But while some supermarkets are still evolving into retirement platforms, FundsNetwork is looking to turn its own platform into a practice management offering. "Wrap is just a platform to make everybody's life easier by improving service, adding value and driving costs out of an adviser business," says Burgess. "It shouldn't be something you use to load up your client with 45 extra basis points for an Isa. That won't work."
One area Burgess expects platforms to help advisers exponentially is in dealing with the review of legacy assets. "This is simply by taking all back-office data, throwing it into a machine and uploading it into a platform system," he says.
"Platforms can also help those advisers going through that tough two-year period as they try to transform their business into more of a financial planning operation. They can show advisers there is an income stream for future quarters and, if they factor that in, they can pay advisers upfront as a factored ongoing commission.
"If this process keeps going along the lines it currently is, the challenge to life companies will only increase as more competitors flood into the retirement market. To be successful in this new world order, parentage, and the subsequent scale it offers, will be crucial."
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Entry deadline: Friday 28 September 2018
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