November 2010

MULTI-MANAGERS: delivering greater choice

tulip_fieldMulti-managers tell Lisa Kindle how they are adapting to changing investor needs, which include tighter risk management and more diversification into alternatives Multi-managers have had to rethink their business models as clients seek more asset classes and value-added services, according to fund providers and a UK pension scheme adviser.

Daniel Melly, principal at Mercer Investment Consulting, which advises many UK pension schemes, says: “The older model of offering just multi-manager funds now has a limited life. Investors want a wider service, which may include strategy advice, for example.”

He adds that traditional standalone multi-managers need to expand to meet these needs.

And also among today’s needs, according to some providers, is access to alternative asset classes along with greater control and risk management for clients over their investments.

JP Morgan Asset Management (JPMAM) is one manager looking to help small and medium pension fund clients obtain exposure to alternative asset classes through a multi-manager solution.

Keith Swabey, managing director in JPMAM’s global multi-asset group, says smaller plans in particular are looking closely at how they can directly access alternatives as part of their general diversification strategy and a less correlated approach than balanced funds. He explains that smaller schemes are constrained by investment barriers such as high minimum investment levels and extensive due diligence processes when looking to invest directly in alternatives. As such, an optimum solution would be to access these assets through models such as multi-management. Desired asset classes include private equity, infrastructure and hedge funds.

“Pension plans want [these asset classes], but they can be complicated and governance surrounding them can become an issue, so alternatives are being used more in balanced portfolios.”

JPMAM is launching a segregated mandate solution this autumn aimed at medium-sized pension plans to address their demand for alternatives, and the firm hopes the product will increase access for smaller funds as part of its multi-manager offering. 

Traditionally, multi-managers have offered portfolio diversification by offering exposure to a range of underlying equity managers or a balance of equities and bonds, but more asset classes are now sought, including currencies and infrastructure, providers say.

Diversification and risk management are two drivers of this trend and both result largely from nervousness about market conditions and fears about declining asset values.

The Ucits III fund structure is helping multi-managers meet the appetite of smaller funds for alternative ways of investing, according to Bernard Henshall, head of sales at Scottish Widows Investment Partnership’s multi-manager operation.

“There is a growing recognition that diversification is a key anchor point for any portfolio,” says Henshall. “There is a shift away from the search for alpha and more interest in risk management. The economic crisis has accelerated this trend.”

He adds: “We are also seeing this in the use of Ucits III funds, which are being used more [as part of] risk management strategies. We are great fans of Ucits III at Swip multi-manager.”

The institutional-targeted Swip Multi-Manager Diversity Fund generated 3.6% in September, helped by recent moves to overweight both commodities and equities. The fund ended the month in the second quartile of its peer group.

Due to the greater post-financial crisis focus on risk management, multi-managers are incorporating derisking strategies into their services as well.

“Clients were not talking about derisking as consciously as they are now. They no longer want to carry as much risk,” says JPMAM’s Swabey. Reduced equities
Funds of funds, a near cousin of the multi-manager model where fund managers invest in the funds of other managers, have seen increased sales in the UK retail world this year and last month saw the timely launch by Amundi, one of the largest asset managers in the world, of the Amundi Funds Multimanagers Long/Short Equity fund. It is Ucits III-compliant and retail investors can access it.

But as well as the foray into alternatives, multi-manager investors have also been lured by the rise of fixed income investing and away from equities recently.

Rob Burdett, cohead of Thames River’s multi-manager business, says: “Our two funds that offer an approximate equal balance between equities and other assets, such as bonds, have proved by far the most popular over the last two years. This is in contrast to five years ago when pure equity multi-manager funds were our team’s biggest area.”
He adds that after the “dash for trash” rally, there is an emerging trend of stock-pickers that find they can add value over and above the recent dominance of macro-driven investment managers.

“Within bonds we see evidence that the best opportunities lie in high-yield and flexible strategic bond mandates now that it is clear that default rates will not hit previously feared levels.” Tactical asset allocation
Global tactical asset allocation (GTAA) has always had a role to play in multi-manager portfolios as an alpha-building block, but there is now said to be more caution about this since some investors lost money when performance dipped in 2008. Nevertheless, investors still want it.

“Some managers did get it wrong and clients have lost faith in GTAA,” JPMAM’s Swabey argues. “GTAA allows you to make extra returns without changing the underlying portfolio, so the need for GTAA has increased recently. Medium-sized plans are starting to look at it as well, whereas before it was just the big plans.”

Paul Kim, director at FundQuest, adds: “I think GTAA has always been there, but it may be that some managers are shortening their time horizons because of the increased volume.”

Thames River’s Burdett adds: “GTAA remains as difficult as ever to deliver on consistently and perhaps even more so during the recent past.

“Our clients prefer to go for managed solutions with the emphasis on an appropriate long-term balance of assets for each client, allied to active selection and management of high-quality underlying managers.”

However, Lloyd Rayner, senior consultant at Russell Investments, explains that although tactical asset allocation strategies can play a significant role, GTAA should be used with confidence as well as caution.

“Clients should not use a large part of their risk budget for tactical asset allocation strategies as these strategies can have a marked impact on a fund’s return, so you have to be confident in any bet you make,” he says.

Although multi-managers have had to expand their business models and strengthen their teams to meet the demands of today’s investors while going through an economic turmoil, flows into multi-manager funds in the UK have thrived in Q2 2010 and it continues to be a dynamic market.

Figures for Q2 from the Investment Management Association (IMA) showed that the fund of funds sector reached a record high. Net retail sales of funds of funds totalled £2.3bn (€2.6bn), making Q2 this year the highest ever quarter, doubling both the previous quarter’s sales and those in Q2 last year.

Newly launched funds of funds contributed significantly to this figure.

Burdett, at Thames River, says: “The second quarter was a record quarter for flows into multi-manager funds in general and also for us, and we believe this trend is secular, underpinned as it is by the need for outsourced investment solutions due to significant regulatory changes ahead occurring at the same time as investment markets require more and more oversight.”

The multi-manager industry may well have been on the list of potential victims of the financial crisis, but for those that successfully innovate and are able to move away from
the standard multi-manager offering – success for the coming quarters is likely to be on the cards.

©2010 funds europe

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