Multi-manager funds have been around for a while now and are growing in popularity. Philip Morse, Gartmore's multi-manager product specialist takes a closer look at the state of the industry
It is fair to say that over the last 20 years there have been many changes in the investment world. The demise of with-profit funds, the introduction of life company internal managed funds, the launch of Skandia a company only offering external fund links - a strategy the industry said would never work! (Oh how times change). Throw in the painful "boom/bust" technology cycle and we get to today.
Today's latest fad is multimanager investing but, is it a fad? It has certainly been around for a number of years although now it seems to have become the much talked about subject. Now that life and pension companies are offering multi-manager funds, business inflows have started to develop strongly. Looking at the last quarter sales of 2004 the top 10 selling companies received new assets in excess of £750m. But where does this place the UK in relation to other countries?
At present the UK is a long way behind the US and Australia who have both led the multi-manager field. In both countries business advisers (like our advisers) go out of their way to avoid investment advice. These advisers are selling taxation and trust planning services - the investment engine is outsourced to fund managers who have the expertise to pick funds and build portfolios.
Wrap services - in their infancy in the UK - are highly developed in both countries. With the plethora of UK companies now offering a multi-manager and/or wrap service, is this where we are heading in the UK? Will multi-manager become the number one dominant force when it comes to investment matters?
As we stand at the moment many industry pundits are also looking at multi-manager as the replacement for with-profit investments. We are not quite sure if this argument stacks up. The average asset allocation of a with-profits fund looks like this:
UK Equities 35%
Fixed Interest 50%
Overseas Equities 5%
So if multimanager funds are the alternative, surely they need to offer a similar asset allocation? You will not find many multimanager funds that have this type of make-up as in the past fund managers have had to abide by restrictive fund rules that stopped flexible fund management. This is no longer the case as last year the new Ucits III rules were introduced allowing fund managers to be considerably more flexible.
For example the Gartmore Cautious Strategy fund is able to invest as follows:
UK Equities 20-60%
Fixed Interest 20-60%
This type of structure allows much more flexibility and a better opportunity for the fund manager to deliver performance in differing market climates.
what type of client does multimanager appeal to?
The industry is divided on this. Many would suggest that these funds should appeal to the smaller investor looking for diversification. Others would say multi-manager funds offer a real portfolio construction service and as such should be offered to the high net worth client.
At the end of the day it is down to the adviser and the client. Multi-manager can work for almost every type of client but these investments are still sold not bought so it is up to the adviser to direct their client.
Two areas where we have been seeing an increasing demand is through self-invested personal pensions (Sipps) and trusts. The Sipp industry has seen an amazing increase in business which is set to increase still further because of A-day. Again, similar to the US and Australia, the Sipp is the pension wrapper - less and less people want to make investment decisions and have to monitor their portfolios on a regular basis so a multi-manager fund can be the answer.
Trustees are more at risk than ever with their responsibilities to beneficiaries. The days of investing trustee money on a deposit account and leaving well alone are gone. Trustees have the responsibility to invest in an appropriate manner and regularly review their investment decisions. Multi-manager funds offer trustees the investment panacea - funds which are regularly reviewed offering investment diversification. Some funds also throw in the benefits of active asset allocation - more on that later.
This is also where companies like Skandia and Selestia come in. Both have been quick to acknowledge the growth in the fund of funds industry and have just added funds from a number of providers including Gartmore. Such a move then improves an entry point for an adviser and client as they can now access the funds through the entire product range offered by the companies.
Such a move clearly demonstrates that fund of funds can sit alongside the manager of manager positions most life companies currently offer. Again, both product types appeal to different types of investor, so surely choice is what is important to the adviser and client?
Some advisers will need to overcome how they can justify their renewal/trail commission if they are handing on the investment decisions to a third party. A few years ago we would have been sympathetic with this view. However, these days there are so many multi-manager funds available that the proper initial research needs to be done. Many funds have performed admirably, but at what risk? Also, once a fund has been selected it is still up to the adviser to monitor the performance and to ensure the fund adheres to the initial requirements of the adviser and the clients.
When considering funds advisers have very little research to rely on because many of the multi-manager funds have short-term track records. Old Broad Street (OBSR) has actually reviewed all the main multi-manager providers in the UK so an adviser should ask a provider their rating. So far, AA appears to be the highest rating awarded.
This research concentrated on how a team picks funds, how they control risk and how they construct portfolios - a real "under the bonnet" review.
An adviser also needs to consider the provider's view with regard to asset allocation. Asset allocation is a really difficult skill and many who have tried have failed. Although very important from a performance point of view it can erode value as easily as add value, because of this the industry finds itself split into three camps.
• Passive: Groups taking no asset allocation risk and rebalancing back to a benchmark on a regular basis.
• Active: Group happy to take asset allocation risk up to a point. At Gartmore we would fall into this category looking for asset allocation to add approximately 25% of the overall performance.
• Aggressive: Group looking to add value through major asset allocation bets. They would be happy for all the performance to come from an asset allocation call.
So again, the adviser needs to monitor the group chosen, once again justifying renewal/trail commission. Another consideration should be whether the multi-manager provider is likely to be around in three years' time.
With so many new groups and funds launching into the market only some can be a success. Profitability seems to be based on assets under management.
Artemis recently sold their £130m book of business to Credit Suisse - is this the benchmark amount?
If it is, there are a number of providers that are running considerably less money, which don't have the benefits of a with-profit fund to help subsidise what they are doing. In the future many providers are likely to end up closing their funds or selling onto other providers.
what's the role of a fund manager who looks after a fund of funds service?
Most will have the opportunity to invest in single strategy funds that are FSA authorised. If they consider the onshore and offshore universe, that means they have a choice of over 5,000 funds. Far too many to consider in one go so each of the fund of funds teams will have a statistical screening process to reduce this number down.
At Gartmore once we consider a fund, a seven-page document is sent to the fund provider asking them for detail on their fund. Once this has been completed an interview will take place with the fund manager (usually takes two hours).
If the fund passes these stages we then consider how the fund will fit into the overall portfolio of funds. And remember 10 good funds doesn't necessarily mean you end up with a good portfolio, you need to look at things such as whether the funds compliment each other and whether stock overlap exists.
Once the portfolio is built this needs constant monitoring to ensure the fund is delivering what is expected.
There are a number of multi-manager funds offering differing investment opportunities from low to high risk If you are looking for an alternative to a with profits fund you'll be able to find one.
Multi-manager funds are here to stay - they are not a fad.
When it comes to picking a multi-manager check out how the team run money - what is their OBSR rating?
What is the asset allocation philosophy? And understand the risks being taken to get the enhanced performance.
What's the experience and background of the team running money on the investors' behalf?
What made financial headlines over the weekend?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch