October 2011

MULTI-MANAGEMENT: A shrinking population

Shrinking-ice-creamMulti-manager fund launches continue to decline, as does the number of administrators in the sector through consolidation. Stefanie Eschenbacher looks at the drivers for this and asks about prospects for new products in a tough fund-raising environment.
Consolidation has been a major trend in the multi-manager space since the financial crisis began, with some of Europe’s biggest asset managers merging or restructuring their businesses. While the financial crisis did not trigger this consolidation, industry experts agree that it certainly accelerated the trend. When Henderson Global Investors acquired the Gartmore Group in April, just months after it took over New Star Asset Management, three Gartmore multi-manager funds were merged into the existing Henderson range as a result. Mark Harris, the former head of multi-manager at Henderson, and his colleague, Craig Heron, left not much later. Bill McQuaker became the head of multi-manager and deputy head of equities. He says that merging the multi-manager fund ranges of the three groups has enabled the company to grow its asset base considerably. It was a strategic fit, he adds, because both the direction of the market and client requirements had changed. “There has been a proliferation of different products and a number of multi-manager funds are somewhat subscale,” McQuaker says. “Some managers are running as little as tens of millions of pounds. Scale has become more important.” It was the second big merger in recent months, after F&C Asset Management had procured Thames River Capital in September last year. The four F&C multi-manager funds were merged into four Thames River funds. Robert Burdett, the joint head of multi capital at Thames River, shares McQuaker’s line on consolidation and scale, and adds that investors have a preference for asset managers with strong brands, performance, and client services. Meanwhile, Schroders Investment Management decided to merge its multi-manager and multi-asset teams in February. Andrew Yeadon, the head of multi-manager, left and handed over the management of the combined team to Johanna Kyrklund. Architas Multi Manager, FundQuest, LV=Asset Management and Santander Asset Management have also reshuffled their multi-manager arms. Santander went a step further than most of its competitors by building a global multi-manager team. Tom Caddick, the former head of multi-manager at LV=, heads fund management, and José María Martínez-Sanjuán heads fund selection. Caddick joined Santander in October last year along with Toby Vaughan, who is a senior manager. “We have centralised the investment process and are increasing the consistency of our portfolios across the board by asset classes and types,” Caddick says. Since then, Caddick and Vaughan have focused on expanding the level of manager exposure by adding to the range of underlying funds being used within the portfolios. In some cases they have increased the breadth of their investments. Apart from making changes to the 14 existing funds, they have also launched a new product, a multi-manager global emerging market equity fund. No surprise
Peter Toogood, the director of investment services at Old Broad Street Research, says the consolidation came as no surprise in difficult market conditions. Multi-manager funds add an extra layer of diversification either by holding single-manager funds that have already gone through a process of diversification, or by breaking up a portfolio and outsourcing the management to individual managers. They aim to bring together a range of specialist managers into a single fund. The benefits of diversification, however, come at a cost. And even though spreading the risk is important in volatile markets, many investors are asking themselves whether the costs they are paying for actively managed funds in general are justified. Multi-manager funds carry an additional layer of fees, typically a 1% management fee and, in some cases, a performance fee. Even though multi-managers can invest more cheaply in other funds than retail investors, it pushes up their total expense ratio. The total expense ratio for multi-manager funds investing in externally managed equity funds is 2.47%, while the fee for those investing in internal funds only is 1.72%, according to ratings company, Lipper. Actively managed single-manager funds, on the other hand, have an average total expense ratio of just 1.68%. “Costs represent a potential drag on multi-manager funds,” Toogood warns. “The existing multi-manager model has an additional layer of fees that can add to the cost of running a fund.” Scale economies in bigger funds, however, should bring down the costs of investing. Investors are, therefore, likely to benefit from consolidation as merged funds should have a lower total expense ratio. “In the teeth of a continuing bear market, the sector continues to face competition from alternative structures such as the risk-profile funds,” Toogood says. “Managers can, therefore, only justify the extra layer of fees if they are successful in delivering outperformance.” New fund launches have struggled to attract new money, mainly because the market has been dominated by a handful of big players. Hard to be distinctive
According to Lipper, asset managers launched 607 new multi-manager funds in Europe in 2007, but only 394 in the whole of last year and 238 since the beginning of 2011. Burdett says it is challenging for multi-managers to be distinct in a crowded market place. “Other equity managers can differentiate themselves by adopting a momentum-based, value, growth, small cap or large cap style,” he says. “If a multi-manager only invests in value funds, he loses the key benefits of running a multi-manager fund, which is diversification.” Burdett, who previously ran money for Credit Suisse and Rothschild Asset Management, says it is harder to turn a new multi-manager fund into a commercial success than other equity funds. Ed Moisson, the head of UK and cross-border research at Lipper, selected five key categories for multi-manager funds domiciled in Europe to assess their average performance, and then compared them to single-manager fund equivalents. He says multi-manager funds have, on average, performed worse than their single-manager counterparts. To offer investors something different, asset managers have developed new types of multi-manager funds. Multi-asset funds, for example, can invest in several different asset classes, including alternatives, bonds, cash, commodities, equities, private equity, and property. Aberdeen Asset Management, Aegon Asset Management, Barings Asset Management, Henderson, Fidelity Worldwide Investments, Schroders, and Standard Life Investments have all recently launched such multi-asset funds. The number of absolute return funds and multi-manager funds investing in them has also grown in recent years. Lipper says in the past two years the sector has, by far, been the most popular among investors. More launches expected
Ben Yearsley, an investment manager at Hargreaves Lansdown, expects more new fund launches, especially as there are still some multi-managers who have left their jobs but who have not yet joined other asset managers. And for those who have, asset managers are likely to launch new funds. More new launches are likely should Richard Philbin, the former head of AXA Wealth’s multi-manager division, and Keith Speck, the former head of multi-manager at Santander, take up new positions. Dean Cheeseman, the former head of multi-manager at F&C, has taken a position at Mercer in February to oversee discretionary client assets. Harris recently joined Eden Financial to develop its multi-asset product range and co-manage one of the existing funds. “The multi-asset approach is a much more modern way of managing money,” he says. Eden considers an absolute return multi-strategy and a growth fund for Harris. Although Harris says there is a “significant market gap” for high-quality multi-asset funds at the lower end of the investment risk spectrum, he warns there are not enough managers who have experience allocating to all those asset classes. Performance is of paramount importance when it comes to attracting new money, but capital preservation becomes an even greater priority for investors and their advisers in volatile markets. ©2011 funds europe

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