Graeme Mitchell, financial director at Lowland Financial shares his thoughts on the multi-manager industry with Chris Salih and explains why he is happy to let an external expert pick fund managers for him
Following the problems with many with-profits funds, advisers need new solutions. Multi-manager offers an alternative, but many advisers are still keen to know the impact on their business. Each month RealAdviser interviews an adviser who is looking at different solutions for his clients' investment portfolios.
RealAdviser talks this month to Lowland financial director, Graeme Mitchell about his use of multi-manager products. He believes multi-manager has benefited his business, saying: "I am happy for an expert to pick fund managers while I concentrate on the fundamentals of my job, namely strategy, goal setting and other planning issues."
Although Mitchell is very much in favour of multi-manager in the UK, he believes it is still embryonic compared to other models around the globe. "Major groups like Russell and MLC have not impressed yet on performance returns," says Mitchell. "Its simply too early to look at multi-manager track records in the UK, three years is nothing."
Here Mitchell looks at the evolving multi-manager industry and explains how he chooses the right solutions for his business:
What clients are most suitable for multi-manager products?
Practically everyone has some use for multi-manager propositions in their portfolios. By outsourcing this investment component to professionals, I can spend more time with my clients focusing on strategy and advice and provide a more complete service to them. I recently met David Haintz at a seminar in Edinburgh. David, who comes from Melbourne, took the view in 2001 that he could not offer bespoke investment management services to his clients and as a result he has gone virtually 100% multi-manager. I would not necessarily follow his example but I like to put a fair proportion into multi-manager propositions. Guess who won the Australian Best Practice IFA of the Year Award in 2004?
How did you choose the multi-managers on your platform?
I split the selection process into two parts, pensions and investment. The Pensions Profiler research system offers numerous filter criteria for companies, for example groups with no initial charge and penalty free switches. The Pensions Profiler has recently added manager of managers as one of its distinguishing criteria, so if we want a manager of managers' product, they will show what companies are available. However, the downside is that they should broaden their manager of managers' to a complete multi-manager filter, because groups like Clerical Medical, for example have a fund of funds proposition that doesn't show up on the filter. I would much rather both propositions showed up under one search. Using our current criteria, we recommend pensions with Scottish Widows, Scottish Equitable, Standard Life and Clerical Medical.
On the investment business side, Oeic and Isa, we use Fidelity, which has two multi-manager funds - growth and income - based on successful principles from the other side of the Atlantic. The other choice is MLC; I like the fact that MLC automatically re-balance their assets, the group ensures we can identify the right asset mix for a particular client and they will maintain and develop that mix for the future.
Do you feel IFAs are sceptical about allowing other people (multi-managers) to pick funds? Do they think it is their job?
This IFA is definitely not sceptical, I am happy for an expert to pick fund managers while I concentrate on the fundamentals of my job, namely strategy, goal setting and other planning issues. It is true, IFAs as a body have set themselves as the experts to pick funds in the past but it is becoming increasingly difficult to pick funds. There are actually around 7,500 fund managers spread across the world and it is difficult for an IFA to argue that their time is best spent trying to research, select and manage these managers for their clients.
Schroders' multi-manager newsletter stated that over 340 fund managers had resigned over the past three years. How can a fiercely independent IFA devote the time and resources to investigating funds? Answer: I'm afraid we can't. Multi-manager tracks the manager of a fund, a difficult, time consuming job for us to do ourselves. This job is hard enough to do as it is. The more time we are able to get to talk to our clients and find the best solutions for them, the better.
How do you explain the idea of multi-manager to your clients? Did they understand?
I try to keep it simple. The key for most portfolios is diversification and not having all your eggs in one basket. A helpful analogy I tend to use is the Olympic Decathlete - a superb athlete in his own right but not as good individually as the best runners, jumpers and throwers in their own sports. In the same way good life or pensions companies will tend to have specialist areas but cannot be competitive in all areas, so why not go for best of breed? I think that our clients do understand.
The premise is that instead of going into pensions or investments through four or five products, multi-manager allows you to get access to a lot of companies through one or two doors
Did multi-manager have any impact on your insurance?
No - I reviewed our insurance in November, and for me, the question never came up. It was about the only one that didn't. I suspect that unless it is 100% multi-manager, there is no effect on insurance. P.I. Insurers have suspicious minds and long memories.
Does it help with administration?
Yes. Only this week a member of staff commented on how quickly MLC returned our year-end Isa application form and received the contract note, particularly compared to one of the supermarkets who we have not heard back from with regards to the Isa application forms submitted at the same time.
With the right companies, administration improvements can be significant, especially as we approach the brave new depolarised world on 1 June. Not only should there be far fewer plans to be updated, but the time savings on fund research and other administrative aspects will help us keep our costs down as clients start to scrutinise our fees. This allows us to provide more accurate information for our clients.
Because multi-manager groups like MLC hire and fire fund managers and rebalance portfolios automatically for me, this eliminates a lot of time, pain, and paperwork from our office. It means that we only have to monitor one arrangement and the asset mix is maintained until the next review.
What would make you drop a multi-manager from your approved list?
It would have to be a result of dire performance or administration. If you look at multi-manager general funds in the UK in the last few years the returns have been mixed. Major groups like Russell and MLC have not impressed yet on performance returns. This can largely be attributed to the fact that both have had large international exposure, and international equities have not done as well as UK equities. It is simply too early to look at multi-manager track records in the UK, three years is nothing.
If the administration of a multi-manager was poor my response would be not to add and I would monitor the multi-manager closely, which is what I am currently doing with Fidelity due to on-going changes to their administration - most notable of which was the decision to relocate much of the servicing overseas.
What type of access do you have to your managers?
We don't meet them all but we monitor their performance regularly. I feel that there will be so many multi-managers in the market soon, rather like individual funds; we will struggle to pick the right multi-manager proposition. Following a plea in the financial press earlier this year, some firms such as OBSR have approached me and offered to make life easier for firms like us because they have the potential to research multi-managers. In short, if you need detailed research on the multi-manager sector, watch this space.
What do you feel are the key factors in selecting a multi-manager?
It is important to look at the core business of the firm. Is multi-manager investing ALL they do or is it a relatively new part of their business? It is also important to look at the historical numbers across risk and return scenarios to ensure that the group's process has stood the test of a full market cycle. The people and process within the firm are probably the most important though, even more so than the numbers. You need to be comfortable that the multi-manager group has a strong, experienced team and that the success of the business in running multi-manager portfolios is not due to luck or any one individual.
I chose to ignore multi-manager up until a year ago. Coming from a mainly pension background, my big hang-up was the annual management fees of around 1.5% a year or more compared to stakeholder charges of 1% a year or less. When I spoke to David Kerr from MLC and Darren Wagner-Amos from Scottish Widows (Russell), the interesting thing was that both had antipodean connections. I was impressed by what they had to say and saw a potential new model for my business making more time for advising clients. I arranged to visit some IFAs in Sydney last October to help me find out more from people who had been using multi-manager funds for years and prepare for the new polarisation laws, which come into effect on 1 June this year.
Some companies base their funds on the sector average asset mix. Others, such as MLC & Russell set specific asset allocations. For example each has a fund with a 50% Bond and 50% Equity content and rebalances the assets back to these amounts. I prefer this approach as it automatically sells when an asset has increased in value and buys when it has fallen. In short a contrary, disciplined investment - but keep an open mind for alternatives.
How do you judge performance?
This is a big issue. As I said the multi-manager concept has only been around in this country for around three years and although I like it and think it will work, three years really is not long enough to judge. I have seen its success over time in Australia, where MLC has been above average for around 20 years and I know there is similar evidence from the States. It is very difficult as there is not a lot of historical evidence in the UK. I would like to see property as an asset class in more multi-manager funds. I am sure this will come soon but it is a big omission for many portfolios at the moment
Do you insist on a three-year track record?
It is preferable, but it would not stop me buying a new fund.
Have you found that the fund of funds or manager of managers have worked better in the market?
I am not concerned; I am really into the concept of multi-manager as a whole, not one part or another. I have seen the benefits and drawbacks from both propositions. If I had to pick I would slightly favor the manager of managers' solution because the structure that a manager of managers uses to hold the funds makes it much quicker and more cost effective to terminate one manager and bring a new one into to the mix.
How do you feel the multi-manager market is developing? Are you finding more choice and better products?
I don't necessarily see products getting any better. However, more companies are linking multi-manager funds to existing and new products for clients. In that respect there is definitely more choice. I am also interested in some of the new specialist equity funds from Russell, which are designed to "shoot the lights out" with a small number of managers, while maintaining sufficient diversification to minimise risk. In the more diversified core funds they will typically use 50 to 60 managers.
It is interesting to note that in Australia, the multi-manager solution is less expensive; this has been the opposite to the UK market to date. The introduction of a 1.5% a year stakeholder management charge will bring more multi-manager funds into contention. Self invested pension arrangements with separate fees for advice together with clean multi-manager investment terms will, I suspect, add to this move towards multi-manager funds. As the difference in costs is becoming ever more marginal, the multi-manager proposition with greater diversification and less risk attached, becomes far more attractive. This increased scrutiny of fees and pressure on price will, in my opinion, mean better opportunities for clients, advisers and companies in the multi-manager arena.
Joined as head of strategy, multi asset, in June
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