Multi-Manager Interview: L&G

Barney Hatt talks to Alan Thein, co-manager of L&G’s multi-manager range, about his chosen strategy for the three portfolios

Launching a multi-manager range just before the collapse of the global financial system may not sound ideal.

However, the three multi-manager funds launched by Legal & General in April 2008 are all in the top decile within their sectors.

According to Morningstar, the £276m Growth fund is 22nd out of 116 of funds in the IMA’s Active Managed sector, up 23.1% over one year to 24 May. The £191m Income fund ranks 18th out of 148 funds in the Cautious Managed sector, up 20.4% over the same time. The £13m Balanced fund meanwhile ranks 12th out of 145 funds.

Alan Thein, who runs the funds with co-manager Tim Gardner, says: “All three funds have held up very well compared to the competition.”

The multi-manager funds really got off the ground after Bradford & Bingley allocated the management of its £400m multi-manager mandate to L&G (taking it away from Axa) in July 2008. The greater proportion of the assets were allocated to the Income fund giving it a quick boost early on.

Thein says a fundamental part of each port-folio’s focus is on choosing good funds and sticking with them, although he adds the final decision about switching the investments comes down to himself and Gardner.

He says having a small team of four people – two analysts work with Thein and Gardner – has allowed for quick changes in asset allocation to be made if necessary as communication is swift and easy.

“Everything rests with us. There is no house view to go by. If we think change is warranted we will make those changes but will avoid being forced into capitulation due to panic,” Thein says.

The managers view themselves as multi-asset investors.

“There is no point in investing in everything just for the sake of it because you end up with something which is over-diversified and buying things that are over-valued,” Thein explains.

“It is about having access to all the tools but not necessarily having them all in your kitbag at the same time.”

They spend a great deal of time and effort conducting research and visiting fund managers, and Thein believes this ‘research capital’ gives them an edge over their peers.

“We back ourselves and our managers with conviction,” he says, “For me this shows the proof not only of our process but also our managers because it avoids over diluting the fund.”
The average holding in each portfolio is about 15 to 20 positions.

“If you look at the industry as a whole this is definitely on the concentrated side. Most of the multi-manager peers hold 30 plus funds,” Thein says.

“We understand risk and the need to be reasonably diversified but think this top end is probably too diversified. It shows the conviction we have in our process and belief we have in our underlying funds.”

Thein says it is important to avoid unwanted risk by having a continuous portfolio monitoring review process in place using independent objective challenges to their process.

“There is nothing worse than saying ‘I believe in China’ and having every piece of research you read back you up on China,” he says.

“It is always good to have people who are bulls and bears with different views to yours.”
The managers avoid things they do not understand. Thein explains: “If you can not understand how it is making returns you have a duty not to invest, because if it goes wrong you can not tell your investors why you invested in it.”

The funds were insulated against the impact of the sharp equity market falls in 2008 by avoiding exposure to funds invested in highly leveraged companies in the property, private equity or hedge fund space.

Over the last year returns have been driven by a bias towards equities in Asia and emerging markets, which have performed particularly well since markets rebounded in March 2009.

Top fund choices over the last year include M&G Recovery, run by Tom Dobell, Richard Buxton’s Schroder UK Alpha Plus fund and Richard Woolnough’s M&G Strategic Corporate Bond fund.

The Income and Balanced funds in particular benefited from the managers’ decision to move from gilts, which they held in 2008, into an investment grade portfolio in 2009.

The funds have gone through a lot of shifts over the last six months. Towards the end of 2009 the managers moved out of investment grade and into overseas bonds and emerging market debt, and in 2010 they have reduced exposure to riskier assets.

“This year will be a very different environment to last year. It will be a lot more volatile,” Thein says.

In February the managers made their first move into the long/short equity space by investing in GLG UK Alpha Select across all three funds. “We think it is a great thing to have during such a choppy volatile period. This has played to our market asset theme,” Thein says.

“We avoided those assets during 2008 believing anything alternative or hedge was too illiquid and too leveraged.”

The managers also decided to take the Argonaut European Income fund out of L&G Multi-Manager Income in February.

Thein explains: “We did not have a negative view on the fund – it was more our view on Europe per se.”

They used the money from the Argonaut fund plus proceeds from elsewhere to build a new 7% position in the Veritas Global Income fund.

“It was based on our view that it is better to have a more global mandate looking for global equity income, and the way Veritas do this is very positive in our mind,” Thein says.

In May the managers moved holdings from Philip Gibbs’ Jupiter Financial Opportunities fund into his Jupiter International Financials fund.

“We have been long term investors in Gibbs which has proved very beneficial to us, but we feel the International Financials fund is a more flexible mandate for Gibbs,” Thein says.

“If you are slightly worried about how the environment might play out this year then his ability to go market neutral and be fully invested in this fund gives him a bit more flexibility compared to Jupiter Financial Opportunities.”

In recent weeks the portfolio has been boosted by their decision to be light on European assets.
“We have been underweight the euro and Europe for some time, and this has worked particularly well,” Thein says.

He adds: “We have taken some risk off the table but we still see some upside. Obviously markets are focusing on everything negative at the moment but there are still positives as economic momentum is being maintained.

“We are watching a number of indicators to see if things are going negative. We are cautiously positioned but still expect the year to be more positive for stocks than bonds over the year as a whole.”

Thein believes multi-asset funds offer investors a portfolio with the best risk/return trade off in the current volatile market conditions.

“You have got all the bricks there – it is just a question of how you put them together in the portfolio,” he says

“If you did not have this flexibility to my mind you are short changing your investors. You are not giving them the full potential of the asset classes.”

“I think this is the way this industry is going. This is what our clients ultimately are looking for, namely the ability for us to give them both an alternatives bias in asset allocation and fund selection.

“If you look back over the two years since we launched performance has come from both these areas.”

Profile

• Alan Thein has 11 years’ investment experience. He Joined L&G as director of the Investment Manager Research Unit (IMRU) in 2004.

Between 2004 and 2008 he set up and headed IMRU before co-founding with Tim Gardner the new L&G Multi Manager business in April 2008.

He has been co-manager of the L&G multi-manager Growth, Income and Balanced funds since April 2008 launch.

He was previously a senior investment consultant at Mercer Investment Consulting responsible for asset allocation, fund research and analysis, largely for institutional clients and pension scheme trustees.

• Tim Gardner has nine years’ investment experience. He Joined L&G as a senior investment researcher in 2006.

Between 2006 and 2008 he worked in the IMRU before co-founding with Alan Thein the new L&G multi-manager business in April 2008. He has been co-manager of the L&G Multi-Manager Growth, Income and Balanced funds since April 2008 launch.

He was previously an investment consultant at Mercer Investment Consulting responsible for asset allocation, fund research and analysis, largely for institutional clients and pension scheme trustees.