Are multi-manager products suitable in retirement planning?

Joanna Faith takes a look at the latest research to determine what advisers really think of this solution.

Multi-manager funds have soared in popularity since their conception in the UK nearly two decades ago, mainly thanks to the diversification they provide.

Unlike a traditional managed proposition, which holds a selection of stocks or bonds, a fund-of-funds invests in a range of vehicles. These solutions provide exposure to a variety of asset classes, manager proficiencies and styles.

With the pressure of the looming 2012 RDR deadline, commentators expect the demand of these funds to surge as advisers consider whether they want or need to be researching and making investment recommendations themselves, particularly with the current market volatility and the ramifications of getting investment decisions wrong.

The recent market difficulties have made advisers look around and, in many cases, decide to outsource the investment process, multi-manager being one of the routes they are taking.

But are multi-manager funds suitable for all clients’ retirement needs? What type of client would benefit from investing in this fashion? And how much of an investor’s portfolio should be allocated to these propositions? 

With the spotlight firmly on multi-manager funds, Professional Adviser decided to take a closer look at how IFAs are using these propositions when carrying out retirement planning for clients. 

The survey was carried out online with 167 advisers filling out the online questionnaire. 

We started by asking respondents what proportion of clients are currently invested in multi-manager funds. The results were spread across the board, with about a third saying 1%-10%, 10% saying 76%-100% and 14% saying none of their clients used this style of investing. (See chart one)

We then focused on the suitability of multi-manager vehicles in SIPPs, asking what percentage of a client’s SIPP portfolio should be in a multi-manager fund. Most respondents thought a half to a third of a client’s portfolio while only 13% said 76%-100%. 

In terms of size, over a third felt £100,000 should be the maximum size of a SIPP for multi-manager, while 19% said over £1m and 23% thought £100,000-£250,000. 

Choosing a multi-manager

Respondents were then asked about the main criteria they would use to select a multi-manager provider for a SIPP client. Almost half of advisers said past performance was the most important consideration with brand, manager name and length of manager service at the bottom of the scale. Other decisive factors included: price, understanding manager process, consistency of mandate, investment style, risk control parameters and OBSR or Morningstar ratings. A large proportion of advisers said all the above mentioned criteria were an essential part of the process. 

We then asked respondents how often they reviewed the asset allocation of clients: weekly, monthly, quarterly, every six months, annually or less frequently. Two front runners emerged with a third saying annually, and a third quarterly. Meanwhile, 4% thought asset allocation should be reviewed less frequently than once a year. 

They were then asked what size of portfolio they thought multi-manager is appropriate for. While only 5% said it was right for clients with portfolios of between £100,000 and £1 million, 40% said the solution was suitable for all clients. 

Advisers were then asked how many different multi-managers they would consider using. More than a third said above three, while 27% said two to three and 24% said one to two. At the other end of the scale, 11% said they would not use multi-manager at all. One adviser said he did not use the investment style as it was “overpriced”. 

The next part of the survey focused on the type of client multi-manager is suitable for: growth, growth and income, income or in-retirement. A staggering 60% said it was most appropriate for growth and income investors. Next was income clients with almost half the vote, while in-retirement and income were neck-and-neck with 35% and 31% of the votes respectively. One adviser said he only used multi-manager for “cautious” clients, while another said for “conservative” investors. One said he used the investment style for “those who like paying high TERs”. 

We then asked respondents if they thought there were too many providers in the multi-manager space. A third said there was about the right number while 27% said there were too many and only 3% called for more to match demand. 

We then presented advisers with a list of when they use multi-manager. The majority – 73% - said in an ISA, followed closely by 62% who said within SIPPs.  (See chart two)

Managing allocation and volatility

Advisers were then asked about the most appropriate way to manage asset allocations and volatility. The overwhelming majority said: “active management by experts”. Meanwhile, other popular options included: regular reviews and active rebalancing; quantitative analysis; using a wide spread of funds and diverse risk categories; and understanding risk parameters requirements and timescales. However, some advisers found it difficult to provide an answer: some simply replied: “Not sure” or “Good question”. 

The survey then focused on how frequently a fund manager’s performance and risk characteristics should be measured to ensure consistency: monthly, quarterly, every six months, annually or less often. Nearly half of the respondents said quarterly, 25% said monthly and 18% annually. (See chart three)

The next question asked advisers about how they document their investment research as part of their due diligence process. This question provided the widest range of replies, with answers varying from keeping online records to downloading data from Morningstar, Trustnet and Financial Express Analytics. Others said they regularly reviewed investment committees, kept up-to-date spreadsheets, retained data indefinitely, kept weekly records, kept notes of manager meetings, updated online libraries, or centrally through a fund review team. 

Finally we asked advisers how they felt a multi-manager strategy supported their investment proposition. One adviser said it freed up time to concentrate on holistic financial planning and generating new business. Another said it enhanced his firm’s proposition while reducing the risk to both his business and his clients. One adviser said it meant rebalancing was done for him and although rebalancing on a daily basis “is something very desirable” he cannot do it due to a “lack of time and the cost to client if he did”. 

Despite the benefits of multi-manager investing, some advisers are unconvinced about using it within retirement planning. A number of respondents said it does not support their investment proposition at all, citing high cost as their main deterrent.  

Joanna Faith is features editor of Retirement Planner’s sister title Professional Adviser