The jury is still out as to which multi-managers can deliver on the promise to find the best of breed, but for those who can prove competence in manager selection and portfolio construction there are significant rewards
The 'multi-manager' concept is one of the fastest growing sectors in the asset management industry. Cerulli Associates recently reported that there is now more than $1 trillion held in global multi-manager products (excluding funds of hedge funds). This is up 30% on last year and is predicted to continue to grow by 14% pa compound until 2008.
Many new players have entered the UK market recently and, as the market expands, there will be both winners and losers. The jury is still out as to whether many of these can deliver on their promise to find the best of breed but one thing is certain - for the winners who can prove competence in manager selection and portfolio construction, the future looks very bright indeed.
The attraction for advisers and clients alike is the opportunity to outsource the time-consuming and resource-heavy tasks of researching and selecting investment managers - time and effort that may be better spent on financial planning, product selection and developing relationships.
What is multi-manager?
Multi-manager has been popular in the US and Australia for many years. As it can mean different things to different people, before looking at these products in detail, it is helpful to consider how the various styles function:
• Fund of funds (Fofs) (unfettered): consists of other funds managed by different asset management groups.
• Multi-manager fund: consists of either funds and/or mandates managed by different asset management groups.
• Manager of manager (Mom) products: consists entirely of mandates managed by different asset management groups.
Traditionally, the manager of manager concept served the institutional market, while fund of funds were aimed at more retail investors. These distinctions have been eroded since the market has started to grow rapidly. The key requirement for a product to be considered as multi-manager is the use of different investment managers within one product or service.
The concept of multi-manager is sound - find the best of breed, get them working together as a team and superior performance should be the result. Sounds simple enough to do, but is it?
Premier league football managers try to do this week in, week out with varying degrees of success. They seek to create a balanced team of individuals, with different skills, that play well together - they know that a team consisting of 11 strikers will not win too often.
The overwhelming argument in favour of the approach is that no one manager can be the best at everything. The best analogy that explain the benefits of multi-manager investing is to compare the personal bests of Daley Thompson, the double Olympic gold decathlete, against the world's best at the 10 individual events that comprise the decathlon. The graph illustrates this perfectly and shows that in some disciplines an 'all-rounder' can be close to the world's best. This is also true in the world of investment management where a manager's performance will be strong in some sectors but rarely in all. In the 100m, Thompson would only need to improve his performance by 4% to match the best in the world. However, in the three throwing events, his personal best was only around 70% of the world record, requiring a 40% improvement in performance to match the best.
A team consisting of specialists in the individual events would comfortably outperform even the best all-rounder as different decathletes generally excel in different disciplines. In portfolio construction terms, if the three weak events were major asset classes, clearly, selecting the best performer in each event would achieve overall superior results.
Therefore, the two skills necessary to the successful multi-manager are the ability to identify top specialists - managers who are considered to be the best in their respective asset class, and the ability to put these together as a team during portfolio construction to create superior results.
Benefits of multi-manager
The main benefit to clients is to gain from a team of investment specialists looking after their money on a day-to-day basis. Most advisers simply do not have the time or resources to actively review the entire universe of asset managers and available products. For example, there are probably over 17,000 mutual funds (including offshore funds registered for sale in the UK) that an adviser could recommend. Researching these is a considerable task in its own right - and that is before portfolio construction is even considered.
Choosing to recommend multi-manager products is effectively the outsourcing of investment decisions and this offers many benefits to advisers. While not all may be comfortable with outsourcing investment decisions many are, and the growth of multi-manager business reflects the increasingly popularity such products have with advisers.
Researching and selecting investment managers is a lengthy, specialist process and outsourcing it can save considerable time, time that can be spent with clients on financial planning, product selection and building strong relationships.
The principal benefits to advisers are:
• Reduced costs and increased efficiency - through simplified administration and reporting.
• More time with clients.
• Active investment management - ongoing monitoring and review of managers selected.
• Access to a wider range of investment products - given the research capabilities and resources of multi-manager organisations, more likely to invest in lesser known fund managers and new funds that do not have a long-term track record.
If the selected multi-manager does not perform as expected, the adviser can change the manager and, in this capacity, is acting more as an overseer than investment adviser.
Just as asset managers and mutual funds are researched and rated, so too will multi-managers be. Forsyth OBSR has recently started researching and reviewing multi-managers and the increasing number of products available will mean that all advisers have to do is simply select the right multi-manager.
For advisers who can prove competence in manager selection and portfolio construction, the rewards are promising.
The two skills necessary are the ability to identify top specialists and the ability to put these together as a team during portfolio construction to create superior results.
Researching and selecting investment managers is a lengthy, specialist process and outsourcing it can save considerable time.
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