Coming to terms with terminology
Multi-manager Multi-manager can be anything from two balanced managers – a strategy adopted by many medium sized pension funds – to a core index fund with satellite active specialists (core/satellite) – an approach favoured by Watson Wyatt and William M Mercer. The point to remember about multi-manager is that although the consultant advises on the appointments, the trustees retain control over who is appointed and have a direct agreement with the asset managers.
In defining different types of manager it is important to keep in mind their objective. Watson Wyatt suggests the following benchmarks for outperformance, assuming index is zero:
l Balanced 1% pa
l Active specialist 1.5-2% pa
l Satellite 3% pa
Multi-style Multi-style is used to reduce the risk of the short term volatility that results from style bias. This is achieved by appointing two or more managers for each asset class. The managers have different (complementary) styles so that the fund performance is maintained throughout the market cycle, whether the flavour of the month is value or growth, small or large cap, pharmaceuticals or IT. Multi-style, therefore, reduces the opportunity for exceptional short term outper-formance but over the long term minimises risk at total fund level.
Manager of managers As currently offered, MoM is usually directed at the institutional and high net worth individual markets and offers a range of sector funds – for example domestic equities, overseas equities, bonds and cash. The trustees hand over to the MoM provider the responsibility for selecting, hiring, monitoring and firing the sector fund managers. The trustees or foundation board usually retain control of the strategic asset allocation or direct the MoM to act in accordance with the scheme’s statement of investment principles. The important point to remember is that the asset management agreement is between the trustees and the MoM provider – not between the trustees and the sub-managers.