The multi-manager solution has gathered both momentum and success, says Richard Philbin, head of fund of funds at F&C Asset Management, and it is the ability to pick and blend the best funds that is key to a multi-manager's reputation
The success of the multi-manager proposition is, in large part, a function of the investment environment in which we now find ourselves. The heavy regulation to which the financial industry is subject means time and resources are increasingly scarce for today's financial adviser. Add to this an ever more complex investment world of multiple options and investment opportunities and it is little surprise product providers have sought to profit by providing a potential solution.
Ironically, it is a solution to a problem to which they themselves have contributed - there are now more than 20,000 onshore and offshore collective investments registered for sale in the UK. The heavy marketing of the multi-manager proposition by product providers is now significantly tilted towards the approach's inherent benefits and the opportunities it creates for the professional adviser.
Among the most saleable points is that the use of a multi-manager allows advisers to get back to the real value-add aspects of their business - face-to-face client meetings, the development of professional connections and new business generation.
Overall, however, the contribution clever marketing campaigns and glossy brochures add to the multi-manager proposition's success fades against the contribution made by the real hunger for, and practical usefulness of, multi-manager products.
Any dedicated stockpicker points to the divergence of returns within an investment universe as their source of opportunity for adding value by picking the right stocks, bonds and so forth to invest in. And even when there are significant sectoral themes, such as those seen in the outperformance of oil and mining in recent months, there is often sufficient divergence between sector constituents to bang the drum for professional bottom-up investment expertise.
The rise of the multi-manager owes as much to the dramatic expansion of the collective investment universe as anything else. The choices investors and their advisers face are now greater and more confusing than ever and, crucially, divergence of performance between investment options can be enormous.
Of course, there are specialist investment advisers who focus on fund selection, but for many it can prove to be an overly onerous task. And, yes, there are a raft of fund selection tools and ratings agencies on hand to assist in the process - often at a price, however - but the job of fund selection is an increasingly hard one.
Once the choice to invest in a particular asset class has been made, many investors and advisers are inexplicably drawn to performance tables to assist in their fund selection. This approach is likely to prove unsuccessful, however, as it fails to take into account one of the key problems investors face - finding funds that perform well on a consistent basis.
Indeed, performance is only one of the factors that should be considered during the fund selection process and, even when performance is focused on, investors would be wise to ensure numbers are run over as many periods as possible.
The process should then be repeated on a regular basis so that any performance-related issues can be identified promptly. But while performance is clearly important to consider, it remains only part of the whole picture and those selecting funds should assess a raft of other numbers including consistency of returns, risk, and an assessment of how much return is being delivered by the input of the manager as opposed to the underlying market movements.
Consider the complexity in assessing areas such as these - and then place the calculations in the wider context of the investment universe - and the size of the task becomes apparent. By way of illustration, at F&C we estimate we run more than 160,000,000 fund performance calculations each calendar month. Is it any wonder many professional advisers choose to outsource the analysis of the funds marketplace to those with sufficient dedicated resources?
Multi-managers offer more than a fund selection service, however, and take the next step on from fund choice - portfolio construction. This is a process that involves the assessment and analysis of how fund selections are best blended together in a wider investment portfolio, not to mention the ongoing monitoring and rebalancing responsibilities.
Just as an equity fund manager considers the balance and interaction of their individual investments, a multi-manager seeks to best match portfolio constituents, taking into account factors such as convergence and correlation.
Take, for instance, a portfolio constructed with income in mind and you are likely to see one tilted towards income-producing assets and, within equities, substantial exposure to equity income products. The UK Equity Income sector is blessed with a number of strong funds run by managers boasting impressive track records - but drawing portfolio constituents from this elite bunch may not be as straightforward as it sounds.
While pursuing roughly the same objective - an above-average income - the sector demonstrates a breadth of variety in terms of investment style, cap bias, number of holdings and tracking error. The job of the multi-manager goes beyond picking the best the sector can offer to the analysis of potential holdings in line with a more holistic portfolio approach.
This stage of the process is critical as those investors and advisers outsourcing to a multi-manager portfolio are, in effect, making their preference for a conservatively-run style-neutral product abundantly clear. Should they wish to move up the risk/reward spectrum or gear into any particular theme, we would expect them to tap into it via a direct 'satellite' holding to supplement their 'core' multi-manager portfolio.
The handful of UK Equity Income funds we employ across our portfolios display vastly different characteristics but our process drives us towards a point at which we access not only what we believe to be the best funds available but we do so in such a combination as to ensure we are not overly exposed to any particular style bias or individual risk factor.
The number of holdings in these funds ranges from 40 up towards 100 and, while all the underlying managers are fishing in the same pond for their investment ideas, the portfolios are characterised by a range of investment styles - growth, value and balanced. Cap split characteristics meanwhile range from large cap to mid/small biases while tracking errors range between 4% and 5.5%.
We view the aggregate of our equity income holdings as a portfolio in itself and one that should be free of any investment style biases. Similarities between funds is one factor we seek to address and, clearly, from a diversification and risk perspective it makes sense to ensure our constituent funds are as uncorrelated as possible.
With the average number of holdings in each fund being around the 60-stock mark, we would expect to have in excess of 200 separate company investments represented in our equity income 'sub-portfolio'. This clearly has an impact on risk with overall tracking error dropping consistently when all the funds are taken in aggregate.
It goes without saying that ongoing monitoring is a key part of the multi-manager's role - not just the assessment of performance but the amount of risk being taken to achieve returns and, crucially, whether the fund is staying 'true to label' on its stated objectives and methodologies. Yes, it is yet another layer of data analysis and interpretation.
Aside from the complexity of fund selection, investors are faced with an ever-increasing range of choice when it comes to asset classes. Cash or shares would have been the option 20 years ago but now bonds (government and corporate), property (commercial and residential), hedge funds and specialist investments (such as commodity funds) enter the mix.
Investors can gain a great deal through investment in a variety of asset classes - most notably through the obvious benefits of increased diversification, something the multi-manager proposition expounds as one of its key virtues.
As multi-managers, we see the next stage of our job as developing portfolios with a suitable mix of assets, reflecting the needs and requirements of our clients. When this is done in an optimum way, the portfolio should be free of investment style biases and contain assets lowly correlated with each other - increasing the potential for outperformance around the investment cycle as well as limiting the amount of volatility inherent in the portfolio.
Approaches vary between multi-managers and there is also divergence of opinion as to whether multi-managers should seek to add value on top of their fund selection prowess by adding value through active asset allocation within the portfolios.
Some believe clients are in effect charging the multi-manager with decisions on the overall asset mix, while others are of the view that advisers choose a specific multi-manager product on the basis of its asset class mix meeting their client's requirements and would therefore expect it to remain broadly consistent with its original profile. At F&C, we err more towards the latter view but do tweak our weightings to, and emphasis within, asset classes in line with our top-down views.
There is quite clearly a raft of reasons why the multi-manager solution is increasing greatly in popularity - not least the huge difficulties investors and advisers face during the fund selection process. Multi-managers stake their reputations on being able to select the best funds available and blend them together to create portfolios tailored to specific needs.
But while the approaches used by fund of fund providers vary, each investment house majors heavily on the 'consistent approach' it adopts in order to pick the best funds. It is ironic that the wider lack of consistency in the investment fund marketplace has been a key driver in the increased popularity of the multi-manager proposition.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress