Multi-managerOct 13 2014

Delving into different ways of diversifying

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Multi-asset or multi-manager funds can be useful diversification tools in an investor’s portfolio.

The two types of funds can be easily confused though, and investors would do well to understand how they differ before considering how they might fit into a portfolio.

The multi-asset versus multi-manager debate has been rumbling on in the asset management industry for some time but Mike Parsons, head of UK funds sales at JPMorgan Asset Management, provides some clarity.

“Multi-manager typically refers to a fund management team that is able to select funds from other ‘third-party’ providers,” he explains. “Multi-managers essentially delegate the investing within asset classes and sectors by selecting other managers in which to allocate.

“Multi-asset funds, by comparison, are sometimes (but not always) directly invested by the fund manager.”

Mr Parsons admits that the terminology is “inexact”. He adds: “What is clear is that the term ‘multi-asset’ usually describes the overall approach to portfolio construction, whereas the term ‘multi-manager’ deals with how the portfolio is actually built.”

For Cedric Bucher, head of business development at Architas, multi-asset and multi-manager are two different concepts relating to diversification, even though the terms are often used interchangeably.

“Many multi-asset funds do use the multi-manager concept as it is very difficult for one investment firm to be an expert across all asset classes,” Mr Bucher says. “One firm might be strong in emerging market debt; another one has expertise in small-cap UK equities or US high-yield bonds.”

He says the phrase multi-manager is used as an umbrella term for a fund that invests in either the funds of other fund managers (a fund of funds) or in third-party mandates.

Mr Bucher continues: “In theory, multi-manager funds should offer something for everyone. The investment universe, particularly the fund-of-funds space, has expanded greatly in recent years, and investors can access global equities, bonds, property and even some more esoteric assets via a host of convenient packaged products.

“Consequently, there is a tremendous range of investment opportunities available, regardless of risk appetite or investment goals. But with a growing range comes growing complexity as providers seek niche areas of the market to set themselves apart from their competitors.”

Investors should also bear in mind the costs associated with multi-asset and multi-manager funds.

John Ventre, head of multi-asset at Old Mutual Global Investors, notes: “Multi-asset funds tend to be priced in line with single-strategy funds, as the overarching multi-asset fund tends to bear the cost of the underlying vehicles it invests in.”

But multi-manager funds can be more expensive, Mr Ventre explains: “Total costs can be higher than for single-manager investment funds as there are two layers of expenses: those for the overarching multi-manager fund and those of the underlying funds being invested in.”

He also refers to model portfolios, which he describes as “a generic portfolio of funds typically managed to a set of targets or objectives”. These portfolios can provide another way for investors to diversify and can be cheaper than actively managed funds, he points out.

So what should investors be looking for from multi-asset or multi-manager vehicles?

Mr Ventre replies: “An actively managed fund, concentrated on delivering returns without the volatility of equities because most investors lack the risk tolerance to be able to withstand equity-like volatility.

“Investors should look for an experienced manager with a good track record, and a fund that aims to achieve specific outcomes, whether it be income, inflation plus, or risk targets, whilst investing for the longer term.”

Ellie Duncan is deputy features editor at Investment Adviser

KEY POINTS

Multi-asset

Funds that invest directly in individual securities, such as stocks, shares and bonds, and across several asset classes

Multi-manager

These funds invest in more than one investment manager, such as third-party mandates or the funds of other managers

Both types of funds offer investors access to a range of asset classes and different performance drivers through one single investment fund

Model portfolio

A portfolio of funds prescribed for investors based on their needs, typically managed to a set of targets or objectives. They tend to be less actively managed