Five myths of multi-manager funds exposed

Life never used to be so complicated: pension schemes ran surpluses, retail investors invested in equities and bonds and financial markets ebbed and flowed but overall seemed to go up. Choice was good but limited. And then the world changed.

Today the investment landscape is almost unrecognisable from the 1990s, offering funds in all shapes, sizes and styles across equities, bonds and alternatives. All are valiantly trying to offer value in a new world underpinned by huge debt, low interest rates and the ever present threat of rising inflation.

There are few certainties in the world of asset management. We can, however, take it as read that: past performance is no indicator of future performance, no fund manager house is good at everything, no single investment manager excels at all times, and picking managers is very difficult and requires skill, resources and timing. 

All these things make an investment proposition that aggregates and blends good ideas, diversifies risk by using more than one manager and provides ongoing monitoring and governance a very attractive option - in a nutshell, the world of multi-manager and funds of funds. 

However, in spite of their obvious appeal, there are a number of myths associated with the multi-manager strategy; the majority of which are inaccurate, to say the least.


Multi-manager strategies don’t work

Whilst multi-manager in its purest form declined in the institutional sector, it has increased to a much greater proportion in the wealth/retail space. Recent reports suggest widespread use of multi-manager funds in the retail space and the number appears to be on the increase. 

In the institutional space, multi-manager funds were initially seen as a panacea for small- to medium-sized pension schemes due to the blending and monitoring of managers and the diversification away from single-manager risk. This was followed in the retail space by fund-of-fund solutions. Same process, different name. 

Most multi-managers did a reasonable job at generating steady returns while managing risk. Unfortunately, they appeared to fall out of favour with some of the gatekeepers who had originally supported them, mainly due to an inappropriate judgment of success.

Multi-manager funds were never structured to target first-quartile performance rankings over the short-term. Instead, consistent second-quartile returns over the short-term would deliver long-term returns in line with client expectations and in excess of the pack. 


Multi-asset and multi-manager are the same 

Absolutely not. Over the last few years die-hard multi-managers have been relabelled as multi-asset providers. The rationale is simple: multi-asset solutions have become the best selling and most used investment in the UK across all investor segments, whether it be pension schemes, retail investors or charities.

They are the most researched asset class by fund buyers and gatekeepers: it doesn’t take a rocket scientist to work out where you want to position an investment business to maximise growth opportunities. 

Here’s the rub – multi-asset solutions are underpinned by asset allocation and would typically look to generate over 75 per cent of their returns from asset allocation.

Multi-managers, not surprisingly, look to generate the vast majority of returns through research and the use of specialist third-party managers.

Thus, they are two very different propositions, needing two very specific skill-sets. If you have the investment capabilities to blend the two, then you get the best of both worlds. If, on the other hand, you are re-labelling an existing proposition, it is window dressing. 

Asset allocation is a very specific skill-set and has the potential to add significant value to investment portfolios over time: making the decision to move in and out of equities, bonds and alternatives on an active basis is a fundamental way to benefit from valuation anomalies and investment opportunities.

This is very different from picking a great equity manager. 

Names and labels apart, having several levers to pull – namely asset allocation and manager research – will provide better opportunities for performance generation than restricting the process to a single opportunity-set. To implement this effectively, the right team and skills are crucial.  


Multi-manager funds are a rip-off

The fees issue is a red herring, not because fees are unimportant but because of the underlying implications that multi-manager products cost more than other products on a like-for-like basis. Investment funds, like any product, have different component fees: custody, admin, legal, investments, distribution...the list goes on. The most important aspect of this is the performance the client receives net of all fees.  

When buying a car you want to know: a) is it what I’m looking for in terms of style and brand? b) can it do the job I need it for? and c) is it the right price? 

It is the same for any investment product, irrespective of the label: is it what I’m looking for, can it do the job and am I happy with the performance, net of all fees? 

Interestingly, many multi-manager products have little to no total fee differential to specialist single-manager funds, whilst targeting similar investment objectives against similar benchmarks.  


Multi-manager isn’t popular

Almost without exception, clients tend to invest in more than one fund, effectively running a multi-manager investment structure in some form or other. As for investors, such as investment consultants, wealth managers, private clients and private banks, multi-manager is generally their core solution, irrespective of what they label it or how they package it.  


Multi-manager has a limited future

The future is far from limited. Most investment advisers will agree that the vast majority of returns are delivered from asset-allocation decisions.

Get that right and you’ve got a very good chance of meeting your investment objectives. A multi-manager structure is a highly efficient way of implementing strategic views while ensuring a team of specialists research and monitor the underlying managers and strategies to ensure the best blend is used at all times. 

Has multi-manager been poorly represented? Yes. Has multi-manager been unfairly criticised? Almost certainly. Can a multi-manager structure work? Absolutely. 

We believe that using a multi-manager structure is an excellent way to implement both asset allocation and investment views while ensuring checks, balances and good governance.

James Klempster is a portfolio manager at Momentum Global Investment Management (MGIM). The views expressed here are his own.