July 2007


Multi-managers are enabling funds to build more tailored alternatives portfolios, writes Sarah Coles. 'Multi-manager offers a meaninful way to get into a range of alternatives' Say you want a new pair of trousers. You have a choice. You can hire a tailor to make a pair in the perfect cut and colour for your figure and skin tone, or you can hit the high street and see what they have in something roughly your size. Given the choice, who wouldn’t go for the tailored option? Unfortunately, unless you have time for the fittings, and the cash for a tailor, it’s the high street or the high road. It’s not very different when you’re hiring managers to handle your investment portfolio. Given the time and the resources, you can tailor mandates to suit your needs exactly, with the managers of your choice investing in exactly what you want. Without the resources, you’re reduced to taking a fund off-the-peg. Fortunately, developments in the multi-manager market mean off-the-peg investments can be a closer fit than ever. The traditional balanced managed compromise, is the equivalent of wandering into the first shop you see and grabbing something off the rail in your size. It’s never going to be the best fit, and simply isn’t going to pass muster on a governance basis. So modern funds must shop around for a range of managers or funds for their investments. Ian Barnes, director of business solutions at Russell Investment Group, points out: “You might have five regional equity mandates and a couple of bond mandates. You might not want to give your entire UK equity portfolio to one manager, and of course you want the best in each class, so before long you have eight or nine managers to manage. That’s beyond the aspirations of most small and medium pension funds. They don’t have the assets to diversify or the internal resources to handle these investments.” Shopping around
So an increasing number of funds are looking for someone to do the shopping around for them – a multi-manager solution. It’s why the market has been on such a strong growth trajectory across Europe, particularly in the UK and the Netherlands among small and medium sized funds. But just how tailored can a multi-manager be? As Barnes says: “It’s like anything. If you’re large enough you can get what you want.” If your fund runs into the billion, multi-managers will take segregated bespoke assignments, offering a product that’s less of a multi-manager, and more like an implemented consultancy. They’ll build a portfolio specific to a client, and manage and monitor it for them. 07_07_bernetFor everyone else, there are two breeds of manager to choose between. The first is the more typical approach in the European market. It will diagnose the most suitable mix of mandates, and then hire a selection of managers to look after them. These can be tailored to individual needs. Matthew Bernet, head of institutional investments at Axa Investment Managers, says: “The key message is to listen to their sensitivity. They might have had a bad experience in some fields, so a multi-manager has to be flexible in the solution they propose and in the fund picking.” This made-to-measure offering can even include liability-matching. This could be through bond products offered as part of the multi-manager mix, or through duration matching funds that use swaps and leverage to neutralise your duration risk. Bernet says this is increasingly common in the Netherlands and Germany. Your liability-matching funds will then be combined with a selection of external managers offering a broad diversified portfolio, all operated through the same overall multi-manager. Where a client isn’t large enough to warrant mandates of its own, usually defined as around e50m, the manager will locate funds to match their needs as closely as possible, and create a fund of funds. It’s by no means bespoke – but it’s close-fitting, and with more funds on the market available to the fund of funds provider, it’s possible to find a closer match than ever. Little or large?
One argument for using a multi-manager is that it provides access to boutiques and niche managers that you wouldn’t normally be able to use without billions in the pot. In some cases this is possible, but unless it’s your top priority, a focus on boutiques may have to be sacrificed in favour of a wider mix. Most multi-managers claim they pick the best whether it’s the biggest names or the smallest niche players. Amit Popat, head of European development at Mercer Global Investments, says: “With a larger fund manager you need to make sure the people making the investments are given sufficient freedom and the ability to implement ideas. With boutiques they must have the infrastructure in place so the managers can focus on managing rather than on running the business.” In its UK equity portfolio, for example, Mercer uses large managers including Bernstein, and small ones such as Origen. Building block approach
The larger players tend, of course, to have lower charges, which avoids eating into the multi-manager’s cut of fees. But Bernet says there are other reasons not to focus exclusively on boutiques: “Boutiques may be fashionable, but we’re not rushing to invest in them. We like to have a two to three year background on our managers. If a manager is interesting and the fund is small we will take a small allocation and build up our position over time. As the fund grows we will increase our allocation. It may make up an extremely small part of our offering, but it’s on our radar.” Small and medium sized institutional investors have found this first approach attractive. But Guy Willard, a principal investment consultant at Hewitt Associates, says this approach hasn’t taken off among its trustees and larger funds. He says they are sticking with investment consultants instead: “You’re seeing investment consultants coming off the fence and giving much more directive advice, saying ‘These are the managers you should have’. So trustees don’t need a multi-manager to take the burden of picking active managers for them.” Consultants can provide a more tailored approach, without the use of a multi-manager. For these larger investors, there’s a bigger attraction in the second breed of multi-manager: the likes of Russell and SEI Investments, which provide the building-block approach. Barnes says: “They have multiple different equity funds in each equity class, plus bond classes and a whole range of alternative funds including hedge funds and private equity, so you can get whatever you want from these building blocks.” If you want the multi-manager to manage your whole portfolio they have the variety to allow a large degree of tailoring. You can pick the asset classes to suit your needs, and can also get involved in liability matching because providers offer funds specifically designed to do that.” But they also have the capacity to invest just a portion of a fund’s investments. Funds can simply pick the funds that suit their needs. Barnes explains: “A pension fund may want a liability-matching strategy, and may go for an LDI [liability-driven investment] strategy with another provider. But they recognise you can’t just match liabilities, you also need some growth to handle things like longevity risk. So they’ll put half in an LDI  strategy with one company and the other half in a growth strategy with a multi-manager.” This approach has been particularly popular among funds looking to diversify into alternative investments. Barnes points out: “There’s a damaging decision paralysis linked with the decision to go into alternatives. What does it mean? Hedge funds, private equity, infrastructure or all of them? Typically a scheme will go into one of them, and gets comfortable with it over one or two years and then goes into another. It can be 15 years before a fund builds up a sufficient allocation in alternative asset classes. There will always be someone round the table who says now is a bad time to go into a specific asset class. So multi-manager offers a meaningful way to get into a range of alternatives.” Lots of multi-managers have introduced more alternative asset classes such as active currency, global property, private equity, and hedge funds of funds. So with more on the market, there is a package of alternatives to suit most institutional investors. Within the two approaches there remains one key sticking point. Steve Turner, principal at Mercer Investment Consulting, explains: “The only thing stopping the trend is that in general performance has been underwhelming, particularly in the UK, and in general providers have not done themselves any favours in that respect.” Variable performance is just one reason why if you use a multi-manager you’ll still have to monitor performance closely. Turner says: ”If a multi-manager experienced turnover of key individuals, or organisational upheaval they would have to consider moving the investment. They would need to review the investment as often as any single fund.” And persistent poor performance would need a root and branch review of the multi-manager and the funds behind them. After-all, middle-age spread means that even the most wonderfully tailored pair of trousers needs regular updating. © fe July 2007

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