How to choose a multi-manager fund

Paul Burgin looks at the different types of multi-manager funds available to investors

Convincing the intermediary market that outsourcing to multi-managers is a good move has taken time. The best performers are now consistent sellers, indicating a sea-change in adviser thinking. But no fund of fund portfolio is alike. Mindset, parentage and distribution goals play equally on design and performance.

Funds of funds fall into three distinct categories, according to Bambos Hambi, ex head of Gartmore’s multi-manager proposition and now a consultant to the asset management industry.

The first is what he terms the aggressive camp. These managers tend to be more assertive in terms of product design, strategy, allocation and daily running of their funds. They are higher alpha seekers and willing to deviate from any given benchmark. Turnover of underlying funds can be greater than elsewhere in the sector. Hambi says: “The emphasis is on high performance. Downside protection is also a key issue. I would put the likes of Jupiter and Henderson in this bracket.”

Tactical allocation

The second group are those that work within certain parameters. They use tactical allocation but will only deviate so far from their chosen yardstick. Thames River’s Rob Burdett and Gary Potter and the Gartmore range would be suitable candidates for this description, thinks Hambi.

The final group often comes from a manager of manager background. These tend to build fixed strategic allocations that are subsequently rebalanced on a regular basis.

Hambi says: “Some but not all life companies operate on this basis for their default funds.” As an example, he says Mark Harries at SWIP operates a far more active, go anywhere portfolio than one might expect.

At OBSR, Nigel Whittingham has taken the categorisation process one step further. The company has five different categories based around two determinants: return and asset allocation.

The return factor breaks down into subsets depending on whether a manager operates on a relative, total return or target return basis. Whittingham says: “Relative return biased funds are managed with regard to a benchmark, often looking to smooth volatility and incremental returns.”

Total returns are all weather vehicles whose managers pay no heed to benchmarks.

Whittingham picks out John Chatfeild-Roberts at Jupiter as a prime example.

There are fewer funds in the third performance category: target return. Whittingham says these funds have very specific expectations. Most are multi-asset, multi-manager funds with very different constructions and risk profiles when compared with other funds of funds on the market. SWIP’s inflation plus MultiManager Diversity fund and vehicles run by Marcus Brookes at Cazenove fit the bill.

At a second level, Whittingham differentiates between active allocation and fixed allocations. Fixed allocations are decided at the outset and then reviewed periodically. Active managers are more likely to review and change their portfolios to suit market conditions.

Combining the two factors – asset allocation and return – gives a number of different combinations. Whittingham says advisers should look at how each fund is run, rather than just split them into distinct camps such as manager of manager or fund of funds.

Even within a single asset management range, styles can vary greatly. He points to Skandia which combines both ‘fixed asset allocation/relative returns’ in its traditional FoF funds and its best ideas range which offers ‘fixed asset allocation/absolute return’ strategies.

Care should be taken when assessing funds with a fixed allocation policy. Whittingham says: “Historically, multi-manager was promoted as a solution to IFAs. Rather than them having to allocate, the decision is made for you.”

Staying on your toes

With either the active or static allocation model, advisers need to be on their toes. Static portfolios may no longer suit when market conditions change. Likewise, more actively run funds may change profile if they move heavily towards cash or another single asset class to take advantage of opportunities. Either way, both scenarios should prompt a review to ensure that funds continue to suit each investor.

With RDR looming, asset managers are looking at how to solve the continued risk-matching issue. The likes of Aegon and Skandia are developing risk profiled ranges that stick within defined risk limits and offer a ‘match client’ solution. More will follow, says Whittingham.

Active have the edge

In the meantime, active allocators have the edge on performance, thinks John Husselbee at North Investment Partners. He says strict static allocation models often found in default pension and other wrapped products have fallen behind as stock markets have not moved over the long-term.

He says: “The performance difference is getting more noticeable. We have switched from a long term bull market to a bear market since 2000. Short-term, we have seen a rally, perhaps even a turnaround, but equities have gone sideways for a decade.”

Active equity and multi-asset FoFs should have the advantage if the long term bear market continues. Even if it switches to a bull market, where low tracking errors result in a smaller performance differential, there will be clear opportunities for managers who can dive into cash on a tactical basis.

Husselbee says: “Getting that right has supported the case for active managed rather than always being fully vested. Buy and hold has not worked for 10 years.”

HSBC Global Asset Management launched its Openfunds in November 2006. Andy Clark, managing director for wholesale, says that it was the first big retail brand to step into the global multi-asset FoF arena. In the then bull market, the HSBC strategy was a hard sell. He says: “We said spread risk and look for diversification, but that was not a sexy message at that time.”

Since then, more clients and advisers have taken note as market conditions have deteriorated. Clark says: “In a booming market, we are middle to bottom. But in a falling market, we are top. But the aim is to get away from straight performance table comparisons.”

HSBC’s new World Selection range takes the approach one step further by encouraging clients to think globally for greater diversification. Investors should look for returns higher than gilts but with less risk than being in one single asset class. Clark says few fund groups can offer the strategic breadth and 24/7 tactical skills required to make such a strategy work. He says: “A lot of long only managers are very London-centric.”