Breaking ground elsewhere
Many of the multi-manager developments seen in Europe are mirrored in other parts of the world. Australia, for example, has a well-developed culture of open architecture, and employers, driven by increasing member choice, are delegating investment decision-making and support services. In South Africa, multi-management is increasingly the structure of choice for small pension funds.
A recent Cerulli report on Australia suggested that while retail investors will continue to shun managed funds in favour of bricks and mortar, it expects Australian institutional manager-of-managers usage to remain strong. Analysts are predicting a 14.3% compound annual growth rate in multi-manager assets between now and 2008 and robust growth in implemented consulting.
MLC Asset Management estimates that 30% of the corporate investment market in Australia is now using implemented consulting. MLC chief investment officer Michael Clancy believes Australia’s development is of great relevance to the European market. “We have many different firms doing some form of multi-manager and in some respects we are breaking ground for other countries,” he says. “For corporate clients the interesting thing has been the emergence of the implemented consulting model over the last five or six years.”
Most of the firms offering implemented consulting are traditional asset consultants. MLC comes at it from another direction; having been involved as an investment manager and platform provider it has become one of the leading global players in the multi-manager market.
In Clancy’s experience, corporate pension executives don’t have the ability to make timely decisions on changes to investment strategy, so outsourcing has become a popular option. Equally influential in this move is the shift of responsibility from the corporate to the individual under the new ‘choice’ rules, which come into force in June. The ‘super choice’ legislation means that most employees will be able to choose into which fund their superannuation guarantee contributions are paid. The Association of Superannuation Funds of Australia (ASFA) estimates that 30% of employees already have fund choice and an extra 40% could get choice under the new law. Employees can then pay their eligible employees' superannuation contributions to any valid fund of their choice. Observers note that if not handled right the initiative has the makings of another pensions mis-selling scandal.
Russell currently manages over A$12bn (e7.15bn) in multi-manager assets in Australia. In March the group launched a reworked superannuation outsourcing solution, allowing employers to completely exit the superannuation arena under the new ‘choice’ regime. The product has two core elements – a master trust, which serves as a default fund for employees’ super contributions, and a comprehensive set of support services which allows employers to outsource. Under the new outsourced arrangement, Russell ensures all clients are rebalanced at the asset and manager level at a tolerance of +/- 3%.
In Australia, the asset allocation and geographical split of multi-manager funds would probably be very similar to single manager structures. A pie chart for the Russell Balanced Fund gives a good example of a ‘typical’ asset split.
The search for alpha is a major issue for Australian multi-managers. Changes within the structure of capital markets have made it necessary to gain returns from non-traditional asset classes such as hedge funds and global listed property, and to seek out emerging boutique managers running higher risk niche strategies. A basic multi-manager fund strategy that invests in traditional bonds and equities through ‘big brand’ managers is no longer enough.
As research house Lonsec has identified, capacity is a critical issue in the multi-manager sector, because a number of funds are closed to new investment or nearing capacity, and multi-manager fund managers are under pressure to find new managers to ensure growth continues.
The expansion in the Australian asset management market has raised the level of competition and has also produced a boom for boutique fund managers. Table 1 shows how they have carved out a share of various assets in the last 10 years:
In terms of performance, Australian multi-managers do well over the long term but recent form is less impressive, according to the most recent analysis carried out by Lonsec. Its review of manager performance to the end of 2004 concludes that, with a few exceptions, managers have too much exposure to in-house products, too many inefficient mandates and are confused about alternative investments.
Of the nine multi-managers assessed by Lonsec, Russell Investment Group was the only one to receive the best possible ‘highly recommended’ rating. Groups given ‘recommended’ ratings were BT, Skandia, MLC, Zurich and ING.
Lonsec found that returns from multi-manager funds invested in Australian shares consistently lag those of single-manager funds. Funds that invested in more than one asset class – with between 60% and 80% invested in growth assets – were more successful. Although they underperfomed in 2004, they were able to deliver higher returns with lower risk than single-manager funds over the last five years.
Performance lapses aside, MLC’s Clancy believes that multi-managers’ services will deliver better returns over time. But there isn’t a huge amount of pressure on fees. “The important thing for the industry to make clear is that multi-manager services provide much more than simply fund management, so we would argue that there should be a price differential between multi-manager and single strategy funds,” says Clancy. Lonsec’s research reveals that average fees are only five to 10 basis points higher than for single-manager growth funds.
In South Africa Bernard Fick, head of asset consulting at Alexander Forbes, says the take-up of multi-manager advice is particularly high among smaller pension funds. They generally go directly to the managers, though some go through their general employee benefits consultant. Most funds that have appointed specialist asset consultants would not typically use multi-manager portfolios, although such funds occasionally make use of value added services offered by multi-managers (like unitisation or portfolio administration).
All multi-manager portfolios in South Africa that are offered commercially to institutions are pooled funds wrapped in linked insurance policies (ie assets held on the balance sheet of an investment-only life license). Investment Solutions is the largest provider of packaged multi-manager portfolios in the South African market, with total assets under management exceeding R80bn (e9.9bn). The portfolios in its global range are managed with the assistance of Russell, SSGA and EIM. Prudential is used as a global asset-allocation adviser. Institutional marketing head Evan Ongley says that retirement fund trustees are increasingly investing in niche rather than managed portfolios. Niche portfolios target specific objectives such as funds aimed at investors seeking consistent performance by investing in a number of local emerging funds.
Fick adds that while the main reason trustees opt for multi-manager is ability to outsource manager selection, “through the marketing exploits of multi-managers, many clients do believe that they will experience improved investment performance. Our experience is that the risk-adjusted performance of most multi-managers is in fact excellent.” (See manager analysis charts.)
Fees are not a particularly
contentious issue for multi-
manager clients in South Africa, either. “In a lower inflationary environment, clients are becoming more focused on all fees, but that applies to all managers, not only multi-managers,” Fick says. “Generally, clients accept they
are paying an extra layer of fees on a fund of funds. What is notable is that due to bulking of assets, some multi-managers are able to offer clients cheaper fees than those they would be paying to the underlying managers directly.”
Fick also suspects that experience in South Africa could be of interest to providers in Europe: “Much of what we have experienced seems to be repeating in Europe. It is interesting to see how investment consultants are pooling clients, through multi-manager portfolios, and are then able to generate asset-based fees. This reflects the fact that many clients remain unwilling to pay asset consultants sufficient asset-based fees for pure advice.”