A number of different approaches being developed in multi-manager services are described by Debbie Harrison and Dickon Reid
SEI Investments
SEI Investments, among others, argues that the primary determinant of investment return at the total portfolio level is asset allocation. To control risk, a formal rebalancing programme maintains asset class exposure within specific and rigorously defined boundaries according to the plan’s asset allocation policy.
Rebalancing back to strategic allocation on a monthly basis is essential to maintain the asset allocation which otherwise would be changed by relative performance of different sectors/styles.
There is no typical number of style managers in an SEI portfolio. The companyís strategies range from one specialist manager to 13 depending on the level of development in the market or asset class.
The company says it takes a scientific approach to managing style drift (see below). Systems monitor each buy and sell to check they are within the agreed style parameters. The aim is to spot trends so that even where a manager is achieving excellent performance, if it has changed style significantly it is likely to be fired. This is partly because over the long term the manager would not have the necessary resources for the markets sectors into which it has strayed. But equally, style drift has an impact on the portfolio structure of the entire fund. In some cases style drift may be due to a change in personnel, which SEI would also investigate and act upon.
The company uses analytical tools like the Barra and Wilshire systems to identify a manager’s exposures over time. SEI is in the early stages of evaluating the different characteristics in the UK and continental markets.
One of the challenges for providers used to the US market is to find an appropriate way to measure European managers who generally are not so driven by precise styles. In the US there is a range of indices against which ‘value’ and ‘growth’ for small, mid and large cap stocks can be measured.
Regarding the difficulty, the company believes that benchmarks do exist for the UK market. For example Morgan Stanley Capital International (MSCI) has worked with Independence International Associates (IIA), a Boston, Massachusetts-based asset management firm which researched the historic returns of value and growth securities in the MSCI database for many years. The MSCI Value and Growth Indices cover a full range of developed, emerging, and all-country MSCI indices, including UK growth and value.
The company’s aim is to construct portfolios for style neutrality. At the time of writing the MSCI UK index had a 50% weighting to value and 50% weighting to growth. SEI, therefore, would construct a portfolio strategy, which would be neutral to this weighting.
SEI claims it has the largest manager database in the industry today, consisting of over 13,000 investment products. Many UK consultants rely heavily on information provided by the managers themselves which, the company argues, is not fully researched. SEI’s manager research database draws on the following sources, among others:
q Manager contact history, which includes notes from previous meetings with investment managers as well as any analysis – returns or holdings-based – performed previously.
q Manager profile data – general information on the firm provided from sources such as Nelsons. This includes information on assets under management, corporate structure, portfolio managers, and capabilities/ expertise.
q Manager holdings and analysis (using Wlshire Systems, Barra Systems and Salomon Yieldbook)
q Manager returns and analysis, drawing on performance analysis data from performance statistics providers such as Nelson’s, Lipper, Mobius, The Plan Sponsor Network and Morningstar.
SEI is still working on its fee scale for the UK and continental markets.
NTGI conducts more than 400 on-site manager visits each year and meets each of the 60 or so selected managers at least two to three times a year.
The selection process is in three stages:
q First, individuals are the primary focus. The company seeks star managers and goes with the individual not the house. The company argues that exceptional histories and demonstrated independent thinking are the key to success under NTGI’s supervision.
q Second, the company looks as the philosophy and investment processes of the house itself to determine whether this helps or hinders the individual managerís skills.
q Third, it looks at the strength of the organisation.
This pursuit of star managers has led the company to hire and fire according to where the particular manager is placed. A favoured manager who is thought to be hampered within a particular organisation would be dropped but then reappointed when he or she moves on to an organisation in which NTGI believes his/her skills will be more highly appreciated and will therefore be given the scope NTGI requires to deliver outperformance.
Once the manager is identified, NTGI carries out statistical analysis on two levels.
q The portfolio performance history is analysed to validate the qualitative research.
q Quantitative analysis of how adding the manager to the NTGI fund portfolio team would impact on NTGI’s overall portfolio in terms of style, market capitalisation and active predicted risk criteria.
In some cases, managers are closed to new clients outside of NTGI’s Diversified Fund of the United Kingdom (DFUK) product.
The company believes styles can be over-regulated and has adapted the strict US methodology of managing style drift to the UK market where managers tend to have a style bias rather than a very formal parameter. This means that managers are permitted a degree of flexibility.
The investment manager mix is reviewed if any of the following occur:
q A significant style shift based upon holdings
q A change in personnel
q A change in ownership
q A significant change in risk
q A change in client investment objectives
q A change in market conditions
The review would include a shift in allocation between the managers in each fund or could involve a change in the manager team.
Fees are: (up to £20m) equities 0.75%, fixed interest 0.50%; (over £20m) 0.55% and 0.30% respectively. NTGI points out that these are clean fees and include all investment, administration and custody activities. There is no bid/offer spread.
Insinger de Beaufort
Insinger has approached multi-management in an unusual manner. “Being a small player we had to start with a niche product,” says Laurent Schonker, Insinger’s business development manager, referring to the $80m Insinger Zeus fund. Launched in September 1996 it was Insinger’s first multi-manager fund and it invests in non-speculative absolute return hedge funds. Since the launch over three years ago, it’s posted returns of 70%, with an inmpressive 34% last year.
Insinger also has a domestic Dutch equivalent, the e15m Insinger multi-manager Zeus, that essentially mirrors what the offshore fund does, but with absolute returns in euros rather than dollars. Along with the Zeus funds, Insinger has specialised in investment advice for its private clients and last year South Africa’s Investec appointed Insinger to advise on its multi-manager retail funds. Since the beginning of the year, according to Schonker, a lot of these advisory services have actually turned into investment management on the multi-management side.
Insinger has just received approval from the Luxembourg authorities for a multi-manager SICAV, Insinger Manager Select, a Luxembourg-based entity that will contain two compartments, a global equity and a global balanced sector.
Investment Management Services (IMS)
Investment Management Services (IMS) is a small manager selection boutique created last July and led by Richard Timberlake, a former managing director of Fidelity in Europe. The company selects managers for both institutions and fund of funds and despite its size, eight employees, it advises $750m in funds, comprised of a $250m portfolio of fund of funds and $500m in institutional pension money.
IMS doesn’t buy and sell equities and does little marketing, preferring to advise on the purchase and sale of equities and to concentrate on research. Its composition, predominantly of fund managers is unusual but intentional – Timberlake believes manager selection is better done by investment managers.
It also intends to start an offshore fund but has yet to get an outside account or to set one up. Timberlake says interest from banks and from people operating funds picking in Europe means an offshore fund is likely and Nigel Slade, who has joined from Standard & Poors as the company’s first managing director, will be investigating the viability of starting one.

Managing style drift
The success of multi-style structures depends on the companyís ability to manage ìstyle driftî. Style drift is where a style manager deviates from his or her area of expertise in order to improve the potential for short term gains. For example, in recent years UK growth managers have drifted towards value stocks for this very reason.
Style drift, therefore, throws out of balance a multi-style multi-manager structure and also exposes the fund to the risk that the manager in question may stray into areas where his lack of knowledge will result in poor stock selection and hence long term loss of performance. Equally important, style drift upsets the portfolio structure and asset allocation which multi-style managers believe is critical to successful investment management.
In lay terms, style drift management aims to nip in the bud this deviation from the area of expertise by tracking the purchases made by the managers appointed.

Equitisation of cash
Under the MoM asset management structures run by Frank Russell and SEIC, among others, cash is ìequitisedî to ensure funds are invested as fully as is practical. This involves buying equity futures to maintain a full exposure to equity markets. Providers who use this technique claim that this can add significantly to annual performance.
Although equitisation can be used for any structure, it is interesting that the multi-style MoM providers are the keenest advocates. They argue that control of the asset management selection and implementation process provides the best opportunity to equitise cash. This, they argue, is the sort of issue that can slip through the cracks with core satellite and balanced fund structures because, as Frank Russell put it, “The consultant doesn’t have the discretion, the trustee doesnít have the know-how and the asset manager is not interested.”