Multi-managerMay 25 2016

Dastardly or multi?

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Dastardly or multi?

But against the backdrop of these changing trends, multi-manager funds have consistently held a place in investors’ affections since they first appeared in the late 1980s, and new products continue to launch. With their in-built diversification, the funds have an obvious appeal to any investor looking to spread risk.

Various basic models exist. Some fund management groups rely on their own internal expertise, restricting choice to their own internal funds when selecting those that will underpin the broader multi-manager offering; others use a range of funds to create the targeted asset mix.

Whereas multi-asset funds rely on one manager or team to create the right balance across a range of markets, multi-manager – as the name suggests – rely on managers who can be specialists in each asset class held. By tapping into broader expertise, a multi-manager fund does not require the same level of stock selection as a multi-asset fund. Picking funds rather than stocks may be a different skill, but multi-managers also need to be as discerning in choosing the funds that will underpin the offering.

Limiting risk

A successful multi-manager fund will spread risk for the client, with minimal effort from the adviser. As Laith Khalaf, senior analyst at Hargreaves Lansdown, explains, multi-manager should represent a “one-stop shop for the kind of investor who wants to delegate investment management and wants some diversification. If they picked a portfolio of five funds themselves, that’s a lot of fund-specific risk to take on.”

By picking a selection of multi-manager funds, Mr Khalaf argues, investors can access an even more enhanced spread of risk. Investing in four or five multi-manager funds rather than mainstream investment funds could leave an investor with “between 100 and 150 different holdings” within their portfolio. “That’s the broad appeal of multi-manager,” he adds.

Due diligence

However, this in-built diversification should not lead to complacency on the part of advisers. The spread of risk achieved in practice may not be enough to placate the regulator.

Steve Carlson, a chartered financial planner at Cardiff-based Carlson Wealth Management, expresses a concern that over-relying on multi-manager could be storing up trouble for advisers, especially if using a single fund. It is unclear where the FCA and Financial Ombudsman Service (Fos) stand regarding whether it is possible to argue you are offering full diversity while relying on what is technically one fund, even if it holds several funds within it.

Beyond scrutiny from the regulator, professional indemnity insurers are starting to take an interest too. And according to Mr Carlson, they have begun asking on renewal forms whether advisers are investing their clients in more than one fund, because those that do not are automatically deemed high risk, even if the fund in question is multi-manager.

This, of course, could be just as much of an issue for multi-asset funds, but the problem is exacerbated by the costs attached to multi-manager, which are typically higher than for funds taking a multi-asset or single manager approach. Multi-asset funds are generally directly invested in the underlying assets, and so do not carry extra costs for the underlying funds, as multi-managers do.

Mr Carlson says advisers are “putting their head on the chopping block if total charges are coming at more than a stakeholder fund.” He adds, “By the time you look at platform charging, you are frequently looking at costs of about 1.5 per cent. For me, that – plus adviser charges on top – is too much, both in terms of outcomes for the client and from a regulatory point of view.”

Advisers could offset the cost by charging less for their service, but in reality that seldom happens. To be fair, advisers choosing a multi-manager fund still need to apply the same due diligence, and so should expect to be paid.

Mr Carlson also points out that using multi-asset instead could simply pose a different problem, by not introducing the diversity of managers offered by multi-manager. An underperforming one-fund manager is likely to be viewed as a risk by the FCA, Fos and PI insurers.

Breaking it down

Multi-manager funds are not tied to a specific Investment Association sector, but can represent different specialisms despite the breadth of holdings within.

Mr Khalaf distils Hargreaves Lansdown’s approach to simply picking the very best funds. “We do some asset allocation, but it is secondary to the fund selection. Our view is that asset allocation is an art rather than a science and there aren’t many people who can get it right consistently.”

According to Mr Khalaf, “It is difficult to add value by making big macro-economic calls on various markets, so our approach tends to be to keep an eye on the valuation of markets and move in and out of them dependent on their valuation relative to history.”

While the group’s multi-manager funds are frequently rebalanced, it is rare that Hargreaves will ditch a manager completely – unless they leave the fund themselves. In that instance, the firm will look at the replacement manager, but the approach is clear: “We follow the manager not the fund.”

This loyalty to managers is mirrored by the faith Hargreaves Lansdown shows them. If the manager of an underlying fund should make a big call, Mr Khalaf says, “that’s down to their portfolio management, and that’s what we’ve backed by investing with them in the first place.”

The Bristol-based firm offers 10 multi-manager funds, focused on themes covering equity and bonds, income and growth, as well as on geographic sectors including Europe and Asia. It also continues to expand the range, launching a High Income multi-manager fund in March this year.

Performance

Table 1 shows the breadth of themes available within multi-manager, while also highlighting that no one sector has come out clearly on top.

The Table shows the top 20 UK multi-manager funds’ performance over five years and the range of sectors featured is striking, with none dominating. Eight sectors are represented in the top 10 alone, with three funds coming from the Global sector.

The diversification of risk implicit in the funds did not enable them to escape the turbulence of investment markets over the past year. Of some 830 funds across the multi-manager sector, just 130 returned a profit over the 12 months to 1 May.

While no sector dominates, Barclays has four funds within the top 20, all UK-focused. The two in 11th and 12th are different funds that employ the same strategy within the same sector, so they mirror each other’s performance closely. Elsewhere Premier Asset Management has three funds in the top 20.

The range of sectors represented means very little correlation occurs regarding performance across the board. Hargreaves’ flagship Income and Growth fund sits in sixth spot but Aviva’s UK Equity Manager of Managers emerges as the best performer over five years, returning £1,845 on an initial £1,000 investment at an average annual growth rate of 13 per cent.

The Aviva fund was also one of the few to return a profit over the past 12 months and showed positive returns for each of the past five years, including a 30.2 per cent return in 2012-2013.

Tom Buffham, senior analyst in Aviva’s multi-manager team, outlines the approach. A multi-asset research team judges the macro-economic environment to drive asset allocation decisions, and a manager selection team seeks “best-in-class managers across all relevant asset classes.” Occasionally these teams’ recommendations will combine to stimulate a change or rebalancing of the fund.

The process involves choosing managers for the job and then largely letting them get on with managing. Mr Buffham explains, “Our role is to select, blend and monitor external fund managers. Generally we do not interfere; the best managers have developed a process that works well for them and their team.”

Aviva is also slightly less brutal than Hargreaves if a manager of one of its underlying funds leaves. The firm says its team will meet with the replacement to gauge the likely impact of any changes to style before making a decision on continuity.

Global strength

The Global sector was the best represented in the Table, and the best performing of the five funds is Schroders -managed Multi-manager International. The company also takes the approach of choosing an investment approach, and then selecting managers to fit. Any rebalancing is also driven by manual analysis anticipating perceived trends, according to Marcus Brookes, the group’s head of multi-manager.

He cites the current example of the International fund reducing large overweight positions in Japan and Europe (but maintaining slightly overweight exposure) to move into commodities and emerging markets. “We have not owned emerging markets for over five years, so we are hoping now is the right time to build a decent position, but our intention is to do it on market weakness rather than immediately initiating a large position,” he explains.

Once the managers have been chosen to fit in with the themes identified, Schroders too takes a hands-off approach. Mr Brookes says, “We want to choose the very best fund managers for the market view that we have and let them get on with it. It is important that fund managers are able to maximise the opportunity available to them, so it is not useful to have their investors breathing down their neck.”

Positive returns

Despite the diversity, positive returns are clearly the norm across the whole multi-manager sector – for longer timeframes at least – with double-figure yearly growth rates studded across the table.

Even so, some advisers insist that the multi-manager model represents an easy way out, and that its popularity is chiefly fuelled by the laziness of other advisers, who could just as easily create that balanced portfolio themselves, without having to outsource (and abdicate responsibility for) the fund selection.

Steve Carlson is one who remains sceptical, “There are a lot of advisers out there who just love the thought that ‘right, your risk profile is balanced, this is a balanced fund, we’re putting you in it; there’s no more work that we need to do.’”

He argues that advisers should perform their own due diligence on various funds before selecting and blending a mix of them.

The RDR has led some advisers to follow macro-economic trends more closely so that they can create bespoke portfolios for each; others, driven by cost, are keener to outsource to multi-asset funds or model portfolios.

Mr Carlson outlines what he perceives as a greater split in the industry, between these two camps. “If you want to survive, you’ve got to deliver a fantastic service. People are getting wise to what [advisers] are doing and rightly so.”

He continues, “I see all the time where advisers have advised on something, taken ongoing charges and haven’t done anything. Their service at best has been a cup of tea every year.”

If this split does develop, there could also be an argument that the nascent robo-advice offerings should be the more obvious place for people to go for simple, pre-prepared investment solutions, and that those would also be delivered at a much lower cost than with a multi-manager fund.

Cost is still an issue for the sector – but it has been for a while, when compared with many multi-asset or single manager funds. But access to the range of expertise in multi-manager can not be delivered cheaply. And accessing all the funds individually to create your own portfolio would prove even more expensive, with prohibitive minimum investment levels a further obstacle to overcome.

As the Table shows, returns on multi-manager funds by and large continue to justify the cost. As long as that remains the case, they should retain a significant foothold in the investment market.

They clearly have a role and do make a diversified portfolio easily accessible. Multi-manager can offer diversification of styles and approaches as much as of assets. As a result, as Laith Khalaf says,

“it is very unlikely that all your funds are going to be underperforming at the same time.”

It is true that multi-manager funds might not provide an investment solution on their own, but if you are looking to achieve true diversity, no other vehicle will provide it on its own either.