What next for the multi-manager sector?

Flick back through the archives of Professional Adviser and you will find numerous instances where the consolidation of the multi-manager market has been predicted.

Ten years ago multi-manager was an exciting new concept that large numbers of IFAs were expected to adopt and which saw many asset managers launch funds into the market to take advantage of the predicted surge in demand, only to find it did not occur in the volumes expected.

Slow growth rate

Early growth in the market saw assets under management move from around £11bn in 2000 to £12.5bn by 2004 spread amongst 208 funds. This slow rate of growth prompted commentators at the time to predict a two-to-three year period of consolidation in the multi-manager arena.

That did not occur. To the contrary, by March 2009 the number of funds had grown to 362 but total assets under management had little more than doubled to £28.3bn, according to IMA figures.

But the latest quarterly figures from the IMA show that over the 12 months to 31 March 2010, multi-manager funds increased assets under management from £28.3bn to £46.5bn, a 64% rise, while the number of funds increased by just 16, from 362 to 378.

This upsurge in demand means multi-manager funds now account for 9% of the total retail investment market but is this about-turn sufficient to sustain the large number of multi-manager funds in the market?

Fund managers believe not only will consolidation not occur but also the market is primed to enter a new phase of sustained growth.

Peter Hicks, head of retail distribution at Fidelity, says making assumptions on the possible over supply of funds in the market from the basic figures can be over simplistic.

“The assumption is that all multi-manager funds are designed for a scale operation and to be broadly offered in the market. But if you look through the list of multi-manager funds there are so many different types, aimed at so many different markets, not just in terms of sector and geography but funds aimed at specific client segments and for particular intermediaries. As such, they are not necessarily competing with one another and so this number probably can be sustained,” he says.

Consolidation

Richard Philbin, chief investment officer of Architas, the Axa group’s multi-manager arm, says he has never bought into the idea that consolidation would occur.

“Multi-manager as a market is still very young – there are very few funds with a 10 year track record for instance. In my view, there is a definite need for consolidation of the funds universe as a whole – there are probably 30% too many funds around – but multi-manager would be a very small proportion of that.”

Indeed, far from a possibility of consolidation, Philbin and others believe there is scope for multi-managers to start picking up market share, with some clear fundamentals looking to drive adviser and investor interest in the multi-manager segment.

Hicks notes a growth in inflows into the Fidelity multi-manager and notably the multi-asset fund of funds in the past year. He says he is not surprised by that trend given the profound changes being experienced by the advisory market.

Key among these changes is RDR which, although not directly steering adviser firms to invest in multi-manager, is seeing them review their business operations and philosophy. Part of that review is whether they want or need to be researching and making investment recommendations themselves, particularly with the current volatility in the market.

The difficulties for advisory businesses in effectively managing portfolios through market downturns was brought home by the falling markets in 2008-2009 when advisers found they were hamstrung by their inability to switch client investments without first getting client permission.

“This has made advisers look around and, in many cases, decide to outsource that investment process, multi-manager being one of the routes they are taking,” says Hicks. That operational driver to look at outsourcing will continue and grow, Hicks believes, and will favour multi-manager.

Philbin concurs. “The risk of getting things wrong in volatile markets can really, really hurt you as an IFA,” he emphasises.

“If you think that the IMA has been blending in offshore funds to the IMA sectors and the wider powers under UCITs III means funds can now start investing in ETFs, and using derivatives, advisers are seriously asking themselves if they have the resources and the knowledge not only to select the funds for their clients but also to continually monitor them.

“Add to that the current volatility in the markets and the fact that investors are highly focused on risk to capital and outsourcing the investment decision to a multi-manager with the proper resources starts to make a lot of sense.”

Fund selection

Rob Burdett, co-director of the Thames River multi-manager funds, adds the growing gap between the best and the worst funds in the sectors and the lack of consistency of performance among fund managers at present, are further difficulties advisers must overcome in selecting funds and another benefit of using multi-managers.

“One of the filters Thames River uses is three-year rolling consistency and for the 14 years Gary [Potter] and I have been running multi-manager funds, that is at an all time low,” says Burdett. “The number of funds that have outperformed in the top quartile in each of the past three years to March 2010, is only 0.7% at moment.”

Market volatility has also been a driver to multi-manager over the past year, as more and more investors have turned to the cautious managed sector, wherein lie a large proportion of multi-manager funds. Both Hicks and Philbin flag multi-managers’ ability to diversify risk, balance a portfolio and get access to managers at institutional pricing as incentives for investors to seek out the funds when taking a cautious approach.

“I would argue that multi-manager’s wealth of experience and expertise and the ability to diversify risk through style, manager selection, geography and asset class and to make use of the wider power of UCITs III, has added a value passport to deliver the objectives of the end client,” says Philbin.

Likewise, Burdett highlights the move by stockbrokers to redefine their role and become wealth managers, which has seen them turn to multi-manager as default investments, as another driver.

And, contrary to the consolidation argument, Burdett believes the market may well see more launches, citing life companies as a possible initiator. “Cautious managed funds have in many ways replaced with-profits bonds in investors’ portfolios and I can see the life companies launching multi-manager funds in this space to try to recoup some of the massive losses they have made since with-profits fell out of favour,” he says.

Add to those key arguments the ability of multi-manager funds to switch in and out of funds without incurring capital gains, and the tax efficiency they offer investors to invest outside of ISA and pensions wrappers, any hike in the CGT rate could act as another considerable driver for the multi-manager market.

Managers confident

Given these fundamentals, managers are confident the significant rise in funds under management will continue in the next two to three years, although whether the volume will match the 64% rise of the last year will have to be seen.