The majority of the investment return from a multi-manager fund is achieved through manager selection, according to BMO Global Asset Management’s Kelly Prior and Scott Spencer.
Prior and Spencer, who have been part of the BMO GAM’s multi manager team for over 20 years, said they prefer to bias portfolios towards funds where the managers have performed in various market conditions rather than those that happen to be “in the right place at the right time”.
“Lots get the returns from stocks selection, lots get the returns from a combination of asset allocation and stock selection and no one gets all the returns just from asset allocation,” said Spencer.
“We have 500 manager meetings every year, we have been doing that for over 22 years and we have never come across a manager that gets all the returns from asset allocation.
“It is just too difficult. It is very difficult to out-forecast anyone from a GDP data point-of-view and even if you do, the market may take a different view.”
An example was seen during the 2016 US presidential elections, said the multi-manager. Despite Hillary Clinton holding the lead in nearly every pre-election nationwide poll and in most swing-state polls, Donald Trump emerged as president, taking many by surprise.
And despite most managers predicting a market rout in reaction to Trump’s victory, US markets reacted calmly when the results were announced.
“When Trump was elected, no one thought he was going to be elected,” said Spencer. “‘It is not happening, and if it does happen what you want to do is sell equities and buy gold’ was the kind of view from the markets. But the market took a completely different view on that.
“Those are the dangers of asset allocation: even if you get your forecast right, the overall market may take a different view.”
Prior agreed: “For us it is easier and more consistent to focus on manager selection and, even, if you get your asset allocation wrong, if you get your manager selection right, it can help you out.”
Performance of fund vs sector & benchmark in 2017
Source: FE Analytics
They said last year’s allocation to Merian UK Dynamic Equity is a recent example of the prevalence of manager selection over asset allocation.
“Last year, the average IA Asian fund did about 25 per cent and the average UK All Companies fund did about 13 per cent last year so you had been better off being more in Asia and less in the UK. Indeed, we did have more in Asia,” said Spencer.
“However, if you had got your fund selection wrong, that asset allocation return wouldn’t have resulted in any outperformance.
“We owned Old Mutual UK Dynamic which actually did 30 per cent last year in the UK. So, you have to bear in mind that the fund you buy can make or break your asset allocation decisions.”
Indeed, as the above chart shows, the £479m fund outperformed the average fund in the IA UK All Companies sector by 18.4 percentage points in 2017.
Similarly, they said the opposite scenario was seen in 2018, where the average fund in the IA UK All Companies sector performing better than the average IA Asia pacific fund, although both sectors are down year-to-date.
“This year you would have been better off owning the UK than you would be owing Asia,” said Spencer. “We have the UK fund Majedie UK Focus, which is actually in positive territory [at the time of speaking].
Prior added: “A lot of people have Majedie UK Equity but we own the 'Focus' version of that product, which is the high octane best ideas portfolio so it has a higher active share [more benchmark unconstrained] and is one where the managers put their own money in, a kind of alignment we like.”
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
As the above chart shows, although down by 1.47 per cent year-to-date, the £846m Majedie UK Focus has been in positive territory for most of 2018. It has been top quartile over one, three and five years.
Majedie UK Focus fund is overseen by Chris Field, James de Uphaugh, Matthew Smith and Imran Sattar, and aims to maximise total returns and outperform the FTSE All Share index over the long term through a concentrated portfolio of predominantly UK equities.
It has the flexibility to invest up to 20 per cent of net asset value in shares listed outside the UK and has a limited capacity in order to ensure size doesn’t affect performance.
“We like Majedie UK Focus and we rather pay a little bit extra for a fund that is going to give you more outperformance, it’s worth it,” said Prior. “We appreciate the focus on cost but it’s also about understanding what you can gain and what active management can give you.”
Prior and Spencer are investment managers within the BMO GAM multi-manager team headed by Rob Burdett and Gary Potter.
The nine-strong team in total, co-manage a series of strategies, including the £1.15bn BMO MM Navigator Distribution fund.
“Whilst the BMO multi-manager team undertakes a thorough assessment of the macroeconomic environment, their ambitions are more limited here and fund manager selection is the primary driver of returns,” said the analysts at Square Mile.
“Their main strength is uncovering talented investment managers, sometimes in the early stages of their career, and backing them over the longer term. The team has excellent knowledge of the industry and we think they are sensible investors.
“We believe the BMO MM Navigator Distribution is a robust choice for investors seeking a multi-asset fund-of-funds approach that is managed to deliver a high level of income.”
Performance of fund since launch
Source: FE Analytics
Since launch in 2007, BMO MM Navigator Distribution has delivered a 67.01 per cent total return compared with the average fund in the IA Mixed Investment 20-60% Shares sector.
The fund yields 5 per cent and has an ongoing charges figure (OCF) of 1.49 per cent.