When investing, especially when it is a substantial portion of your wealth, it is paramount to diversify as much as possible, and there are several ways to diversify and not have all your eggs in one basket. Applying a multi-manager approach to your investment portfolio is an added layer of diversification. Illustrating this by using the results of the 2020 Olympic Games explains why it might be beneficial to invest in a multi manager portfolio.
If you compare the results of the Olympic Champions at the 2020 Olympic Games, who specialise in a single event, with that of the Champion Decathlon athlete, there is a significant outperformance. It is not always possible for a Decathlete to deliver a gold medal result in all ten events. There are always exceptions to the rule and in the 2020 Olympics there was one outperformance and that was the long jump, the Decathlete’s distance was 8.24m vs the gold medal distance of 8.11m, an amazing result for the Canadian.
The point I want to make is what the difference in performance could be if you take ten Olympic Champions and clone them into one Decathlete? Unbeatable, right? This is what a multi-manager aims to do, combining top fund managers into one investment portfolio or fund. Even when they select just five of the top single fund managers in a portfolio of ten, I believe the combination could still deliver outperformance.
Investors and single fund managers will argue that their fund is doing fine and there is enough diversification built in already. My view is that a single fund manager can only do well when specialised and focused on a specific sector, an asset class or even a country/region. The bigger fund management houses, managing various specialist funds with a manager managing each fund, will argue that they have all the basis covered. Advocating that a combination of their different funds can provide a diversified solution to most investors.
New Zealand fund management houses such as Milford, Devon, Harbour, Fisher Funds and Clarity is a case in point. Most of their funds have a great track record, but unfortunately not always. There will always be a house view, an investment philosophy or even an investment style that is specific to a Fund Management House. This philosophy, style or view can sometimes be detrimental to investors who has all their investments with a single fund manager or house.
What is a solution and how do you diversify away from specific manager concentration? When it comes to investing, having all your eggs in one basket is never a clever idea and multi-manager portfolios were created with this notion very much in mind.
Given the plethora of investment funds to choose from in New Zealand and the rest of the world, and there are thousands of them, building and constantly monitoring an appropriately constructed portfolio across assets classes and geographies can be a very tricky challenge. Aside from getting the investment selection or asset allocation correct, the process can be both costly and time-consuming.
Multi-manager solutions aim to address these issues by giving investors access to leading local and international investment managers via a single investment platform. Fundamentally, multi-manager strategies came into being to offer financial advisers and their clients a simple, ready-made one-stop shop investment solution.
In the simplest terms, multi-manager portfolios are portfolios that invest in underlying-funds – either fettered, which invest in products from the same investment house, or unfettered, which are free to look across the whole market.
The thinking behind multi-manager investing is that no individual manager can be the best in all market conditions on a consistent basis. To address this, multi-manager portfolios offer a much higher level of diversification than single-manager products, spreading investment risk across a variety of different managers, asset classes and regions.
Diversification has long been recognised as an effective portfolio management technique as it reduces investors’ exposure to any one sector or asset class. Different market backdrops also require different skills, strategies, and approaches. Combining a variety of managers with different expertise in one portfolio across all the major asset classes should not only reduce volatility, but hopefully smooth out returns over time while providing adequate diversification. See the graph below, where Value Manager E, the black line, is a combination of the other four Value Managers (25% in each fund). The returns are less volatile, giving investors a smoother ride over the medium to long-term.
Making the right selection for any given portfolio and refining it takes time, knowledge, and skill. Single fund managers should be closely monitored on a continual basis to ensure they remain consistent in their goals. Few would argue against the notion that in the main, neither private investors nor most financial advisers have the resources, time and skills to do this properly on a consistent basis.
In contrast, multi-manager portfolios are run by dedicated managers and/or specialist teams, who regularly source expert managers they believe can deliver the best investment performance. They also decide how to best ‘blend’ these managers, actively managing the allocation to different assets as conditions change and alter.
A hugely important part of the history and evolution of the multi-manager sector was the realisation that a portfolio of great investment funds does not it itself make a great portfolio. A good multi-manager does more than select the best fund in each investment category and mix them all together; they must know how to blend assets to meet their investors’ needs.
Since the financial crisis in 2007/08 and the one in 50-year negative returns of both bonds and equities in one year (2022), there has been a significant change in market behaviour. Investors have witnessed major shifts in the values and behaviour of both bonds and equities worldwide. Rapidly changing markets and volatility, coupled with political and economic uncertainty, make it exceedingly difficult to predict which region or asset class will perform best at any given time.
Different types of asset classes deliver varying returns, with differing levels of volatility. And the relationship between assets classes may be stronger or weaker over time, making it important to mix these investments in appropriate proportions. Asset allocation is widely viewed as the primary driving factor of portfolio returns and a good multi-manager will view their role as much more than merely hand-picking single funds and managers.
It is therefore common for multi-managers to have a face-to-face meeting with prospective fund managers, so they can enquire about their strategy and how rigidly (or not) they stick to it. Multi-managers will also want to know what sort of resources fund managers have at their disposal and the size of their investment team. They are likely to enquire how the team participates in the investment process. For example, if a fund manager leaves, is there a back-up team in place that can take over under such a scenario? They will also ask about what checks and balances the manager has in place, even how they are remunerated – do they get a bonus for bigger returns, for example – as such a scenario could potentially tempt a manager to take greater risk. Multi-managers are also privy to the full details of the funds they have in a portfolio, which is an added benefit for investors.
However, like with any investment portfolio, fund or strategy there are always advantages and disadvantages to consider:
Primary Advantages:
- Multi-manager portfolios or funds provide investors and advisers with a broad diversified portfolio, which is professionally managed.
- A multi-manager has great flexibility as to where they can invest, local or international, different asset classes, distinctive styles, sector and regional diversification etc.
- Multi- managers take an active approach to asset allocation decisions on behalf of their investors and build a diversified portfolio aimed at delivering consistent levels of performance, with lower volatility.
- Multi-managers can quickly adapt to changing market conditions and aim to not only smooth out bumpy periods but deliver consistent returns.
- These funds offer access to best- of-breed managers within a single portfolio – no single manager can be the best in all market conditions on a consistent basis.
- No gains tax when underlying sub-funds are sold by an individual investor.
Primary Disadvantages:
- Costs: given the dual-fee structure of multi-manager funds, the charges are higher than single-fund manager investments.
- Multi-manager funds are more complex than single strategy funds. Doing your research is key as while there are many multi-manager funds or portfolio to choose from, performance can vary widely.
- Risk-rated and risk-targeted multi manager funds or portfolios can be blunt instruments in determining risk. While the former style needs constant monitoring, the latter can be held back due to strict parameters.
- Make sure the multi manager team has enough experience and resources to monitor the funds universe constantly and proactively, the composition of the portfolios and worldwide economic trends. If not, better to stick with your single manager fund.
