Multi-managers set the record straight

The terms multi-manager, fund-of-funds, manage the manager or ‘specialists in formation’ mean the same thing, right?

Wrong, according to the fund managers operating in this space that are seeing the growing interest by other fund managers and planners in what they do.

“An ever increasing number of people are interested. It is getting more competitive and something that is in demand,” Skandia managing director Ross Laidlaw says.

Frank Russell’s head of marketing Craig Morris says the increased interest in the multi-manager style is due to the level of volatility in the market — people are now viewing the multi-manager approach as a more efficient way to invest. He says institutional groups are also showing interest in the approach.

“There is a broader acceptance of the multi-manager approach. You see the banks offering multi-manager as core, take National Australia Bank and the MLC relationship for example,” he says.

However, while the interest of fund managers and planners in the multi-manager concept may have grown, the level of understanding of the concept has not.

“There’s more to it than just going and hiring a few core products and branding them together,” Morris says.

It is easy to understand the broad appeal of the multi-manager style. By offering investors a selection of investment funds with specialist managers, investors can achieve diversification, as well as being able to access the best fund managers in each asset class.

It is also an attractive model for advisers, who can use the style in its purest form as a smorgasbord of specialist managers to create a portfolio that is tailored to their clients’ needs.

Further, advisers can also use it to invest in diversified funds — ready-made portfolios for advisers who want investment experts to design the asset allocation strategies.

According to MLC chief investment officer Chris Condon, interest being shown in this space is coming from those who really want to be involved in a fund-of-fund offering.

“What a lot of new players are doing, and investment advisers are trying to do, is a fund-of-fund approach. What we do is a manager-of-managers, and it’s very different,” he says.

He distinguishes these two approaches by way of an example of how they handle a change in manager.

“In Australian equities, we have seven fund managers. We recently put new managers on and took two off. We were transitioning $4.4 billion in the market, the largest transition in the Australian market,” he says.

Condon says unlike a fund-of-fund manager who has to sell the units and buy others when they are changing over managers, a manager-of-managers in this situation has to terminate only one management agreement and sign a new one.

In this particular transaction, 72 per cent of funds were moved internally, keeping the crystallisation of capital gains to a realisable level.

“We kept transaction costs at two basis points and avoided any market impact. If you try to do that with a fund-of-fund, you have to go to the manager, put a redemption request in, sell the assets, get a cheque and buy another manager’s units. It’s a very inefficient way to do it,” Condon says.

This example serves to explain some of the characteristics of the manager-of-manager approach. Firstly, because it has such scale, it can handle such transactions quite effortlessly.

MLC has $43 billion funds under management invested in its manager-of-managers approach, providing MLC with the resources to do the research and to identify the best managers.

Secondly, a manager-of-managers investment philosophy is to identify the best managers, and its significant scale and resources helps it to do this.

Finally, the structures and the decision-making processes of the fund managers used by a manager-of-manager are important because of the strengths and capabilities of the fund managers themselves.

Condon says while some in the market are able to mimic the mind-set of manager-of-managers, few have the scale to have fund managers design funds for them.

He refers to the case where MLC requested Perpetual Investments Australian equities manager Peter Morgan to design a fund with a concentrated approach to delivering a value result.

“They don’t offer that. But they were able to create for us what we needed,” he says.

Skandia, which has been operating its manager-of-manager style since 1977, considers itself one of the founders of the approach, before both MLC and Asgard.

However, it also uses a “specialist managers in co-operation” description to differentiate its approach, conducting its own manager research to provide both a diversified and best of the best manager selection. It currently has 45 managers on its manager line-up.

“Asgard offers a whole range of choice, while MLC is a manager of managers. We would be sitting in between that. Our major thing is choice,” Laidlaw says.

According to Laidlaw, the challenge for a fund manager such as Skandia that does not own distribution is to remain competitive.

“Because we don’t own distribution, we are forced to be innovative. The products have to be sold because no-one has to buy our products,” he says.

Laidlaw says the fund manager is able to do this through the global strength of Skandia, and this in the end, sets it apart from other fund-of-fund managers, as well as its ability to remain true to its target market of independent financial advisers.

“We don’t mind being considered in line with other platforms. We are not offering the total solution,” he says.

For this reason, he says, few of the fund managers will be able to successfully replicate the manager-of-manager style to the distribution market.

“Few players are large enough to be originators,” Laidlaw says.

MLC, Skandia and Frank Russell all have size on their side, and access to international research further highlighting their scale advantage.

However, while size may help in the actual process of being a multi-manager, unless you have people actually using the style, it does not count for much.

Morris says Frank Russell currently has $7.5 billion in funds under management invested in its multi-manager approach and has aligned itself with like-minded distribution groups such as ANZ, Matrix, Associated Planners and Professional Investment Services.

Morris says these planning groups have embraced the multi-manager approach and have a similar outlook to investing as Frank Russell, where the skills and ability to pick managers remains with them and the advising and relationship-building is left to the adviser.

That said, Frank Russell does not present its multi-manager approach as the only answer available to these distribution groups, establishing its offering as a core investment style for the groups, but with satellite alternatives around it.