Fund managers should be treated like stocks. Once the best in every asset class and style category have been identified, value can be added by short-term allocation adjustments to exploit changes in market sentiment, says David Duncan of Global Asset Management
Global Asset Management’s motto has always been, ‘Access great investment talent’. From the start its assets were managed externally. Before long the initial fund managers were working exclusively for GAM and the search continued for additional great investment talent.
GAM creates and manages portfolios using top money managers worldwide. Its sole criterion in selecting managers is top performance for its clients. Managers are monitored closely and occasional changes made if objectives are not met. GAM makes no distinction between its role as a manager of managers and its management of multi-manager funds.
In addition to seeking the best fund managers in each class, value is added through the active management of allocations to managers to exploit market inefficiencies. Through active monitoring of managers’ behaviour it is possible to identify short-term weaknesses and strengths and to under or over weight their allocations accordingly. Through its strong relationships with the 85 external fund managers currently used GAM is able to provide exposure to funds that are closed to new clients.
Portfolio management
q Accurate creation of the right structure First, the investment characteristics required to meet the objectives for the portfolio must be determined. Which market or markets will the portfolio cover? What is the benchmark? What performance target relative to the benchmark is desirable? With that target in mind how much variability can be tolerated?
GAM then identifies potential managers whose characteristics best match the broad requirements. The exercise is essentially one of coarse filtering whereby our database of over 54,000 funds and fund managers is reduced to a manageable number. In practice, that means reducing it to a working number of about 4,000, with detailed files being maintained on about 1,000.
Statistical modelling is used to find the optimal mix of managers. Attention must be paid to the style used by each manager so that a complementary mix is achieved. Typically, there will be at least seven managers for a regional fund, such as GAM Multi-Europe, and as many as 30 plus for a global fund, such as GAM Diversity.
Due diligence on the potential managers is then carried out through visits to their offices, intensive interviews, credit checks, references investigated and all past activities examined.
q Vigilant maintenance of the structure Vigilance in the face of changing markets and manager behaviour means regular contact with each manager – and regular means weekly in many cases. The purpose is to establish changes in investments, the views of the manager and to identify any intended changes.
GAM’s multi-manager team is an integral part of GAM’s internal investment operations and so has the added advantage of direct access to stock markets and our own fund managers. Through this intelligence gathering operation the multi-manager team fine-tunes portfolios to reflect subtle changes in markets, exchange rates and interest rates. This has been a very successful strategy and added value on a regular basis.
Types of portfolio
q Equity-related portfolios UK and European institutional investors tend to be interested in equity-related portfolios.
GAM Diversity is a global equity fund and currently has 26 external managers. Since inception (December 29 1989), it has produced an annual return, when converted into sterling and after all charges, of 15.9% compared with the MSCI World Index return of 12.1%.
GAM Emerging Markets Multi-Fund is a global emerging markets equity fund and currently has 16 external managers. Since inception (October 21 1991) it has produced an annual return, when converted into sterling and after all charges, of 15.4% compared with the MSCI Emerging Markets Global (Free) Index return of 8.6%.
GAM Multi-UK Unit Trust is a UK equity fund and currently has eight external managers. Since inception (May 18 1999) it has produced a return, when converted into sterling and after all charges, of 19.5% compared with the FTSE Actuaries’ All-Share Index return of 9.8%.
q Non-equity-related portfolios European institutional investors also tend to be interested in portfolios with absolute return objectives and that are not correlated with equity markets.
GAM Trading US dollar class currently uses 13 external managers who invest in financial and commodity markets on a long and short basis. Since inception (April 27 1990) it has produced an annual return, in sterling and after all charges, of 14.9% compared with the MAR Fund Pool Qualified Universe Index return of 7.6%. Currently it is closed to new subscriptions but GAM Trading II has been launched as its successor and is managed along similar lines.
q Multi-managership using internal managers Multi-managership usually implies the use of fund managers external to the multi-managership provider. A variation on this theme is GAM’s use of its internal managers for some clients. This is only valid if the internal managers are independent of each other. Also, the separate managers must not be controlled by a higher authority such as an investment committee. The independence of each team is important to ensure that the mix of managers contains as little bias towards any particular style as possible.
GAM has a very distinctive approach to its internal fund management teams. Standard & Poor’s Fund Research had this to say in its group profiles of April 1998: “GAM is a truly investment driven company. Success derives from the founder’s ability to attract some of the best fund managers in the world to run funds for the group, and the freedom and protection afforded to those managers: GAM has no single investment approach – rather an eclectic collection of talented individuals pursuing their own well-proven investment disciplines… Despite or perhaps because of this lack of an overall investment style GAM portfolios typically outperform their sector average. First and second quartile annual relative returns far outnumbered below average returns across the range of GAM funds over the last five years.”
At the end of 1998 GAM launched a new multi-manager service based on seven of those teams – UK large cap stocks, UK smaller companies, global large cap stocks, North America, Europe, Japan and the Far East.
Each client’s Minimum Funding Requirement is unique. To satisfy the MFR the asset allocation pattern is specific to each client. The exposure to each region is allowed to vary between pre-determined limits and a small element of active asset allocation bias is permitted in order to add value.
So far, the results have been most encouraging. For the calendar year 1999 the results ranged from 36.2% to 40.7%. These compare well with the CAPS median return of 19.8% for discretionary portfolios. In the first quarter of 2000 they continue to outperform their benchmarks.
Global Asset Management has always been involved in multi-managership and creating funds of funds.
Multi-managership is a total package that provides professional, active management of fund managers to institutional investors. GAM’s continuous review approach studiously avoids the periodic review process traditionally used.
GAM treats fund managers like stocks and seeks the very best in each asset class and style category. In the process GAM takes responsibility for the thorny subject of asset allocation and adds value by making short- term allocation adjustments to capture changes in market sentiment.
The strategy has been successful. In base currency terms, all of the funds mentioned have outperformed their benchmarks since inception, with a lower standard deviation.
David Duncan is director, European institutional marketing, at Global Asset Management in London