Multi-managerOct 12 2012

Multi-manager: Solutions sought

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Having just spent a couple of days networking with investment-oriented IFA businesses, it is timely for me to be able to air some thoughts on fund picking and risk analysis when working to create portfolios for retail clients.

There was much debate about the differing approaches taken by IFAs when choosing funds for their clients to invest in and I was surprised by the numbers of firms and individual advisers who appear to have swallowed the multi-manager hook wholesale, now passing across all their investment capital to a multi-manager proposition. Consider some of the reasons that advisers gave for doing this and they fall into several distinct camps: first off and perhaps the most numerous are those firms who simply believe that they do not have the expertise and skill or indeed time and resources to pick funds for their clients.

Another cohort of IFAs seem to believe that by using a multi-manager investment solution it in some way reduces their firm’s risk exposure - I venture to suggest that they may just have read too much marketing hype from investment houses and they really need to take a step back and consider the fuller implications of what they are doing. The buck does not stop with the multi- manager provider - the IFA gives the advice and takes the responsibility full stop.

Surprisingly I also found several examples of IFA firms who felt that they were actually not interested in fund selection and investment research and were happy to let somebody else do the work and put the portfolios together and run the money. The conversation around this and sustainable fees post-RDR for independent firms may well be quite interesting – clearly these firms believe that their outsourcing business model adds value in other areas for the client?

Another viewpoint widely held was that in reality the majority of investment IFA firms do not have the capability to choose funds from the total investment universe and that the use of model portfolio makes crushing business sense in the post-RDR business environment. How this will fit with the regulator’s requirements that independents will have to have awareness of and choose from all asset classes and investment products remains to be seen.

It was clear to me that opinion is much divided on the pros and cons of using multi-manager or indeed fund of funds as the basis of the investment proposition for an IFA practice.

The decision making process around this has to be based upon a sound and robust investment research process, one that is clearly demonstrable and understood and practised throughout the firm when advising clients. This is not just the domain when considering multi-manager propositions, but should be the bedrock of any IFA practice working with and advising clients.

With the ever-increasing regulatory focus on ‘suitability of advice’ there is and will be rising pressure on IFA businesses from three distinct areas:

• To adapt and develop their business model across the board to survive and thrive beyond 2013.

• To identify where and how they can work with other organisations to meet their business requirements.

• Multi-managers are clearly presenting a very compelling proposition and if so then what are the key steps IFAs need to take when embarking on this course of action.

As already mentioned above, the IFA firm needs a strategy for dealing with investment clients: do-it yourself or outsource. When outsourcing to a multi-manager provider, the adviser must fully understand their client’s attitude to risk and appetite for equity investment. Once agreed appropriate, then the selection may be made of which multi-manager best meets the client’s requirements first and foremost and the IFA’s business as well. Choice of ‘investment partner’ will be driven by the availability of the multi-manager funds on the adviser’s platform of choice - this is less of an issue as more and more fund houses tie-up their deals with the wraps and fund platforms to make themselves accessible to investors.

Just what are IFAs using when investing with multi-managers? Put simply these funds come under the IMA label of Mixed Investment. With three broad categories of varying share content, the lower this is the supposedly lower risk the fund and the 20 per cent to 60 per cent share sector continues to attract client money. This is puzzling because mixed investment 20 per cent to 60 per cent sector is the old Cautious Managed and basically a bit of a contradiction. The reality for retail investors is that if they are identified as being truly “cautious” then equity investment is not for them, but the edges have become blurred and these funds now try to be all things to all men with very “mixed” results. I stopped investing new client money into one of the flagship Cautious Managed funds because it had simply morphed into a tracker fund and ceased to have any place on my investment fund radar. The multi-manager sector offering some potential value to clients is the Mixed Investment 40 per cent to 85 per cent shares.

When researching these funds, the factors to consider (apart from the fundamental point on client risk profile) are:

• Fund objective as set out in the key investor information document: what is the thrust of the fund management?

• Costs and charges: total expense ratio is not the over-riding consideration despite the views passed down from the regulator but it should not be ignored of course. Like any other collective fund, multi-manager must offer fair value and be competitive.

• Any strong sector bias that might skew the performance of the fund, for example over-emphasis on eurozone right now or underweight in US, may not be the smartest idea.

• Financial strength and track record of the provider offering the funds - big is not always good and some smaller offerings can make huge impact on the success of a portfolio and IFAs need to be aware of the opportunities that do exist. Ruffer is a perfect example of this.

A growing influence in the advised investment space is that of fund risk-rating. Historically I have viewed fund risk ratings as being next to useless. What value a few stars mean when they are handed out by paying the rating agency escapes me? Today things are more helpful, with some of the highly respected fund analysis and research houses applying risk ratings to funds and putting some helpful words around this to position them more usefully for the IFAs to consider. However I still do not believe that this makes a jot of difference to a client whose primary concern is that their adviser knows what he or she is doing, has the client’s best interest at heart and creates and reviews an appropriately designed investment portfolio for them.

For those clients with limited resources or wishing only to dip their toes into the market for example a new Isa client, lump-sum or regular saver then a well-chosen multi-manager choice will be a good fit in terms of providing spread of risk and diversification opportunity.

Where an IFA business follows a well thought out and rigorous investment selection process it is possible to incorporate some multi-manager funds within client portfolios. Having said that, I maintain that the high ground in advised investment business will remain with those IFAs who have and can demonstrate a robust and specialist approach and market advantage will still be derived from fund picking and asset allocation in-house. If the USP for an investment-oriented IFA business is not their research and fund picking then what is it going to be I wonder?

Nick McBreen is an IFA at Worldwide Financial Planning