The multi-manager concept has found two sides of the investment industry fighting for the same business, reports Rachel Oliver
Two sides of the fund industry have found common ground. The multi-manager concept which is manifesting itself in the forms of either individual mutual funds or entire pension plan portfolios, has become not only the domain of fund managers, but also of investment consultants.
The multi-manager approach at-tempts to offer in essence numerous investment managers 'for the price of one', and claims to select the best performing managers in a given asset class by taking the responsibility out of the hands of the investors' and into those of the service provider. The fees charged to the pension fund, which are slightly higher than in a corresponding single manager fund are divided between the fund promoter and the number of managers selected to run different parts of the fund, the promoter having overall responsibility to hire the managers it sees as the best performing in its asset class, to monitor their performance and to fire them should they fail to deliver. A well-established product in the US, it is slowly seeping into the European market, giving consultants and managers an opportunity not only to compete equally with each other for business, but to also have a taste for what it feels like to sit on the other side of a beauty parade judging panel.
Current players in the European market are thin on the ground but include well established names such as Northern Trust Global Advisors (NTGA), Banque Paribas and Global Asset Management (GAM), alongside consultants Frank Russell with the recent addition of Sedgwick Noble Lowndes (SNL) who has in the past couple of months created a funds division and appointed a managing director to spearhead its multi- manager attack initially on the UK defined benefit and defined contribution markets with views to continental Europe later next year.
GAM currently holds $1.5bn in multi-manager vehicle assets, covering offshore funds and segregated mandates investing in global, European and US equities and bonds. David Duncan, GAM director in London, sees the emerging markets in particular as an area where the multi-manager approach can be the most advantageous to pension fund investors. Mainland European institutions are looking very closely at ways and means of investing in emerging markets. Now when they do that they rapidly realise that no one investment manager can adequately deal with all the world's emerging markets," he says.
The element of manager choice in the fund, says Duncan, has stemmed from the need to be prepared for the "dramatic awakening" which he says is taking place in pension funds across Europe, who, following disappointing bond returns are inevitably looking in the direction of the stock markets. But while many European pension funds may hunger more for equities, some are held back to an extent by a lack of knowledge of the players in the market. Enter the multi-manager approach. Where there was little in-terest in such techniques just over a year ago as "there was a suspicion that there were too many layers of management involved", says Duncan, pension funds now seem to be coming round to the idea.
GAM uses 19 different managers specialising in equities, bonds and investing "long and short" in its fund. While using 19 managers for one fund might sound a little extreme, it follows the multi- manager principle of risk diversification, as well as giving investors a wider spread of investment styles and the number of managers chosen can vary greatly. NTGA's UK pooled fund employs 17 different investment houses, from a selection of 80 fund managers, from varying houses worldwide. "It's trying to identify the talented people rather than houses," explains Martin Penton, NTGA director, "Houses stay, the people move." SNL currently implements a seven-manager programme for its balanced vehicle, and Frank Russell opted for just three managers in it's recent US small cap equity fund it is managing on behalf of Société Générale Asset Management in France.
The multi-manager vehicle takes on a different shape or form depending on the provider - GAM and NTGA offer pooled funds with NTGA also competing for segregated mandates; SNL competes for the entire pension fund's portfolio, an area which Russell looks certain to move into with time to add on to its range of 11 specialist funds - but the principle behind the approach is still the same. That is to take full responsibility for an asset class away from a single manager and to 'share the goods' with the intention of achieving higher returns with less risk (no one manager has more than 6-7% of assets under management in a GAM multi-manager fund).
"If you take an ordinary balanced approach and even with some great names, then you wouldn't expect those managers to be good or better than the market in every component part of the investment process," in-sists SNL's Nash.
He continues: "If you can find a means of identifying the best component parts of the marketplace and get economies of scale as you can with some form of a pooled fund approach then if you get all the other things right, you will win."
However, finding the 'best manager' can often prove to be a qualitative decision, based on assets under management, number of of-fices worldwide, whether the manager is well respected in the market, and begs the question, particularly in the UK, whether the same old leading managers will be wheeled out time and time again. With the UK Pensions Act making trustees personally liable for their decisions and the role of the consultants becoming ever more tenuous (which some disgruntled managers say point to their very existence in the funds marketplace), there is cause for concern that promoters will go for the safer bets in-stead of taking the opportunity to in-troduce pension funds to new techniques, which are mainly the territory of the smaller specialist managers. Indeed, Nash admits the smaller players are not considered in SNL's ap-proach, based on its main criterion: "Are they substantial players?" Not surprisingly, therefore, Prudential, Nat West Gartmore, Schroders and M&G are key clients of the SNL balanced scheme.
Alison Ramsdale, director at Frank Russell admits to a high degree of commonality between the choice of managers selected for the fund and those by the main consultancy outfit. Selected managers include Mercury, Gartmore, Schroders and Fidelity. But Ramsdale says that the specialists do stand an equal chance:
"We do use Mercury in our fixed income product but they only have a small portion of the total assets and we have a whole range of different managers. So we don't have all our money with Gartmore, Schroders and so on."
NTGA's Penton acknowledges the favoured five in the UK market often pip other managers to the post, and for that very reason NTGA has established a rule of giving other players a chance and a boot up the ladder by including them in its fund. He names Jupiter, Credit Suisse and Marathon Asset Management as three such examples, though the 'big five' managers do inevitably play a large role in managing the varying assets.
The scale of the manager' business, in terms of staff and assets under management, will admittedly often mean the larger players are in better shape to win business for the simple reason that the fees earned are such as not worth employing dedicated teams to win the business. The fees charged to the client by GAM work out at 1% pa which needs to be divided between 19 managers, not to mention the promoter's own administrative overheads. On the positive side this allows pension funds to use managers at a lesser price than if they approached them direct, but also redefines the meaning of 'doing it on the cheap', begging the question of why managers would actually take part in such a vehicle in the first place, not to mention delivering top performance for a very low fiscal incentive when they could earn near on the total fee on their own.
Penton sums up the reasoning be-hind the managers' participation simply as "money for nothing" adding, "They don't have to market this, they don't have to earn it, and they don't have to look after the client, all they have to do is run the money"
He adds: "We will be commercial, we will try and negotiate everybody down on the basis that they are not having to do a lot of work - we are doing it."
"It is very transparent," furthers Ramsdale. "The client knows exactly what they are paying and what they are paying it for and therefore they can know basically what their bottom line is. All the performance objectives of the fund are stated net of fees, so that is after management, after custody, after administration, so when we say we look to add 2.5% against the ING Barings emerging markets index we mean after they have paid everything."
To date, nine out of Russells 11 funds have outperformed their respective indices since inception, supporting Penton's argument that managers can deliver for less. And, according to Duncan, GAM's emerging markets fund has performed 3-4% a year better than any other fund in the same asset class. "And that is after fees," he adds. "Taking fees into account, it has been head and shoulders above them."
Fees and performance are only two areas which investors would think of querying. A third area, which Ramsdale is only too aware of, is the criticism levied on consultants for 'stepping on the toes' of investment managers. While consultants in the US are long established in the multi- manager funds industry, to the Europeans, it is a relatively new phenomenon, and one which would be cause for some confusion as to the defined role of an 'objective' advisor.
Frank Russell uses the same manager research department as the consultancy side of the business, but has established a Chinese wall to ensure the fund operation is not privy to any information acquired from consultancy clients and has established the boundaries surrounding the recommendation of products to prevent a Russell client inadvertently opting for a Russell fund before viewing other products on offer.
Ramsdale explains: "We don't have access to any information on consulting clients. We don't get to see the files, we are not privy to anything that goes on in the course of the meeting. If a consultant is doing a manager search and he thinks it is appropriate to look at a multi-manager product, he can say 'I think you should take a look at this, it might be appropriate under your circumstances, however, I am not able to recommend this product to you, therefore I suggest if you are interested you talk directly to our funds group' and at that point he exits."
She adds that with a number of cli-ents, a third party consultant has been brought in to offer a second opinion on Russells' funds. "We will recommend to clients that they do that."
She adds: "At the end of the day, the client will make a decision whether they like multi-manager or they don't like multi-manager and that's the critical decision. If you are Fidelity and you are in a multi-manager fund, you sort of have two stabs at it. There's nothing to prevent Fidelity going for the same business. They can appear in exactly the same beauty parade, but they just get an extra chance of getting it."
Multi-manager funds look set to properly enter the rest of the European market later next year. GAM is currently marketing to clients in the Netherlands and France and has experienced a "rapid growth of interest"; SNL is looking to Italy as a key market; Russell has found success in the Netherlands, France and Switzerland to date and is assured enough of the success of the product that it is in the throes of assessing the European DC marketplace to see how it should be approached."