John Monaghan, Origen
With a vast array of multi-manager products available within the market at the current time, investors need to make themselves fully aware of what they are buying.
The term multi-manager is a generic description for an investment solution that utilises the skill of more than one investment manager. The benefits of such a solution have been understood in the institutional market place for many years; the transition of this strategy into the retail space has occurred over the last five to 10 years. The basic premise behind multi-manager is that no single manager is likely to perform well in all market conditions and in all circumstances. Furthermore, it is extremely unlikely that anyone would be able to consistently and accurately predict which manager, or management style will outperform over any given period.
This has resulted in providers realising that the best solution for their clients is to diversify across a range of asset classes using a variety of investment managers with complimentary styles. Therefore, the objective of multi-manager investing, whatever approach adopted, is to reduce the volatility of the investment portfolio without negatively impacting the long term returns.
Despite a common theme running throughout the multi-manager approach, the structure and implementation of the three main types of multi-manager investing differ significantly:
Portfolio of investment funds: This approach is often implemented via a fund supermarket or 'wrapped' solution. The adviser diversifies their client's portfolio across a range of different managed funds for each asset class and will typically select which funds the portfolio will consist of although this is likely to be based on a model for reasons of increased efficiency. This approach differs most from the other two methods as the adviser (or investor) must undertake all of the initial transactions required into each of the underlying funds as well as any subsequent changes or rebalancing back to the model weightings. As investors using this approach are purchasing units in several underlying funds, they will be potentially liable for capital gains tax (CGT) in each of their holdings within their portfolio unless it is constructed around a tax efficient wrapper.
Fund of funds: A fund of funds (FOF) offering differs from a portfolio of individual funds because the investor owns units in the FOF vehicle rather than holding a collection of individual funds. To diversify, the FOF then typically invests in the units of standard retail investment funds. This approach is the most widely used by retail investors providing a well diversified investment portfolio that itself is treated as one fund so is therefore relatively easy to trade in and out of. From the CGT perspective, there is only one potential liability, being the FOF itself although virtually all providers will market their product alongside an ISA.
Manager of managers: A manager of managers (MOM) offers the most sophisticated form of multi-manager investing. They provide the adviser and client the benefit of an outsourced arrangement service; but with some very important advantages over a FOF. The MOM will use segregated mandates with underlying investment managers rather than investing in the manager's existing retail fund. As the MOM provider owns the underlying securities it is not wed to the investment manager and changes can be made quickly and easily when required. However, due to the nature of the relationship between the MOM provider and investment manager on a segregated basis, turnover of managers is considerably less than with a FOF.
At Origen, we adopt the portfolio of investment funds approach for our discretionary managed business while recommending a number of fund of funds providers for our advisory clients.
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