Multi-managers set to take a firm grip

Financial planners are increasingly moving towards a multi-manager approach to investing in equities. By using the structure of a group of equity managers in the one portfolio, there is the potential to access the best fund managers, capture out-performance and to neutralise market swings.

This rationale has become highly attractive to planners approaching an asset class such as equities that is typically volatile, shows style favouritism and in which it is increasingly difficult to find safe havens.

“The equities market has been characterised in the last five years by gyrations in concepts of value and growth,” MLC Investments chief investment officer Chris Condon says.

He says it is therefore important for equities portfolios to contain a mixture of styles and approaches to balance out this volatility.

“While planners have always used a number of different products, the way they put these together is limited by their own resources,” Condon says.

MLC Investments was one of the first groups to use multi-manager investing in Australia in 1986.

Condon says because equities tend to have a broader dispersion of returns than bonds, it opens equities up to a number of styles and opportunities to assemble the most effective portfolio.

While financial planners have historically tried to pick products and assemble their own equity portfolios, it is a strategy that has often left them open to criticism over investment selection and performance.

Snowball Financial Services consultant Dominic McCormick says the trend towards a multi-manager approach reflects planners’ growing recognition that it is an easier solution than constructing the portfolios themselves, and that selecting funds and styles is not where their expertise lies.

“There is a whole trend to use a packaged solution. A lot of planners promote themselves as driving the investment decision. But planners need to be quite clear where their value is coming from,” he says.

While one of the perceived main benefits of a multi-manager approach is arguably diversification, McCormick says the problem with most of the multi-manager solutions is that they are all style neutral and in certain investment climates, there may be an advantage in having a style bias.

However, he says the investment solution provided by a multi-manager approach may be better than planners constructing portfolios themselves.

“A lot tend to be very reactive and based on past performance. Multi-managers prevent that from happening,” he says.

While the trend towards multi-manager is occurring across asset classes other than equities, Perpetual Private Clients national manager investments Brad Holmes says it is probably occurring to a lesser extent.

“Investments such as fixed interest have found it hard to add value in this way,” he says.

According to MLC’s Matt Lawler, it is a trend that draws on the move towards holistic or lifestyle financial planning.

Further, changing a portfolio in an efficient manner is quite difficult, and is increasingly perceived as best handled by outsourcing.

“From a business point of view, portfolio management is quite time consuming, especially when you have to hire or fire fund managers,” Lawler says.

He says over the past few years, multi-manager investing has gathered more momentum, partly due to economic circumstances.

“It is a difficult proposition to see an adviser in a bull market. But if you have gone into a bear market, the skill of the multi-manager sets in,” Lawler says.

In the last two years, the MLC multi-manager approach has increased from representing 20 per cent of a client’s portfolio to 100 per cent.

Lawler says clients need to understand that when a planner advises them to put all their money in MLC, they are still achieving the benefits of diversification.

“It is a trend predominantly driven by advisers because of the nature of the relationship. The multi-manager approach needs to be translated and communicated by an adviser,” he says.

According to Credit Suisse Asset Management’s head of retail funds, Brian Thomas, there is a definite trend back to a fund-of-fund or multi-manager approach.

“About six years ago, the fund-of-fund approach was out of favour, but now it’s coming back. The advantage of model portfolios or fund-of-funds is that it is pre-packaged,” he says.

A multi-manager approach ensures investors get exposure to a range of styles, and depending if value or growth styles are popular, portfolios can be more heavily weighted to reflect this.

“Planners would say their role is about picking the right products, tax and providing strategy,” Thomas says.