2004 was both interesting and challenging for the multi-manager sector because in economic terms, it was a year which has not quite lived up to expectations.
Growth in the US has been fine but the embers of recovery in Europe have failed to ignite and the upturn in Japan remains one more of promise than delivery. There have also been some powerful challenges for investment markets - a strong oil price and weak dollar, but despite this, the background has been overwhelmingly one of consensus.
Looking forward to 2005, the consensus is holding together still with the view the period of strongest growth for this cycle has passed and that world economic expansion will continue, but more slowly. Interest rate changes will be modest. Market returns against this backdrop should be positive but again hard won.
In manager of manager investments, the main focus has to be on finding the right combination of managers who are able to exploit the opportunities available.
Costs, however, become very important, for both the manager and the client.
One of the major costs that can be managed at the portfolio level is the cost of changing managers. Here, the Manager of Managers approach has a significant advantage over a Fund of Funds.
In a Fund of Funds structure, leaving a fund manager means selling all of the units and reinvesting all of the proceeds, i.e. moving the money twice, suffering cancellation prices on the way out and creation on the way in, and including stamp duty in the UK, plus the usual heady cocktail of commission, spread and market impact.
A MoM, on the other hand, is spared most of this. Moving a mandate controlled by the fund will generate portfolio changes but only at the margin. Even these costs can be controlled by managing the changes to keep costs down, using a specialist transition manager where the fund manager cannot deliver the sharpest terms.
Containing costs in this way will help investor returns, and we should remember that the best way of improving risk-adjusted returns is by cutting costs. If market returns of little more than double figures are expected, we also need to look at charges.
How reasonable is it for an investor to bear Total Expense Ratios of more than 2% - and some over 3% - when this represents such a significant proportion of the whole return, particularly when they bear all the market risk?
Frankly, the issue must have a bearing on best advice. In markets which lack volatility, how can we justify asking clients to pay such a high premium for expected alpha when most of the return comes from beta positions?
Overall, I would suggest 2004 was a year in which multimanager made progress but there is a lot to do still. In 2005, it will be the Manager of Manager funds which have a distinct advantage.”IFAonline
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