How are they doing so far?
Recent figures from Russell/Mellon CAPS show that after three years of ‘dreadful’ returns pension funds recorded a second successive year of positive performance in 2004.
The multi-manager sector is a growing part of the industry, but it is as yet hard to see a clear indication of what its performance contribution will be. This is partly due to the fact that a number of funds, like those of RMB MultiManagers (RMBMM), are too new to have produced a long performance record, and partly because industry majors are reluctant to discuss individual fund performance, arguing that the institutional consumer, by and large, is buying a portfolio made up of a combination of funds which meet an individually designed strategy. The performance of the underlying ‘building blocks’ is not important. It is the effect of the aggregate portfolio which matters.
In an attempt to illustrate recent fund growth we have shown figures for four multi-manager specialist groups. Since there is no single source which covers all the companies concerned, these figures are from three different databases and are not in all cases a comprehensive view of the managers’ full multi-manager range. We have shown them against the average of the peer group concerned rather than customised benchmarks. The comparison between them is therefore not scientific, but merely an indicator of performance trends.
Taking performance against the fund sector average as a rough measure, relative newcomer MM Asset Management features well over all the periods shown, though only four of its funds go back as far as three years. All but three of the results shown exceed the sector mean. The Japan and Pacific funds are particularly successful.
Likewise, RMBMM, whose funds were only launched in April 2004, has shown above-average performance almost across the board in six-month performance figures from Lipper’s Hindsight universe.
Looked at in the same way the record of Northern Trust and Russell, based on figures from Russell/Mellon CAPS, displays no obvious trends. Over one year the two groups have two and three funds, respectively, which beat the sector median result. Northern Trust’s Europe ex-UK Equity fund has been a consistent strong performer over the last five years, as has Russell’s Japan Equity fund.
Major multi-manager groups Russell and SEI are both set against the discussion of performance figures on a fund-by-fund basis. SEI does not make individual fund performance figures available at all. “Each client has a customised benchmark according to the appropriate strategy and we aim to produce good performance in connection with that strategy,” says SEI head of institutional business Patrick Disney. “We do not have single mandate clients.
“It is unlikely that our funds would top the first quartile in the short term,” he adds. “We are aiming to offer diversification, risk control and a high information ratio. Our performance record should be good over the long term.” As an indication of performance, Disney says that the group’s bond fund is up by 2% a year since its April 2001 launch by comparison to the Merrill Lynch All Bonds Index. On the equity side performance is up by 1% a year against a demanding global benchmark, he says.
Frédéric Lalande, director of performance analysis at Russell, makes some similar points. “Investors do best by investing in a range of our funds rather than single funds,” he says, adding that of 220 institutional clients only two use single funds. Like most institutional multi-managers, Russell does not make style bets. It also does not hold cash, so funds are always exposed to the market.
Lalande quotes in-house performance figures based on a typical composite of funds, with 45% in the UK, 9% in continental Europe, 10.5% in the US, 5.25% in Japan, 5.25% in the Pacific Basin and 25% in world equities. Over three-year rolling periods from 3Q99 to 4Q04, according to the company’s own calculations, the Russell funds composite has never underperformed its benchmark, with the rate of outperformance ranging from 4.14% (4Q01) to 0.59% (4Q04). In fact, the figures represent an almost uninterrupted decline in outperformance between the two dates.
Glyn Owen, head of multi-managers at RMBMM, has some sympathy with the view that only composite performance should be discussed. “To take individual building blocks may be misleading,” he acknowledges. “If the overall package meets the client’s objectives, that’s satisfactory”. But he adds that, “if the overall portfolio is made up of different building blocks we would like each one of them to be doing well. We do not think it is good enough for a multi-manager to say his service can generate average performance at lower risk. We want to produce a better than average portfolio at low risk.”
There is a good deal to be said with regard to the benchmarks chosen. Just as the client and his advisers put together a detailed strategy, so also an appropriate benchmark will be devised to meet individual needs, and it would be a complex task to reflect each group’s performance against a range of specific benchmarks within a standardised, market-wide performance database.
Apart from anything else, when you choose your own benchmarks, you are responsible for making the task harder or easier for yourself. Outperformance against the benchmark is only as good as the benchmark chosen.
Setting benchmarks for individual funds in turn relates to the nature of the market, says Owen. For example, the US market is the most efficient in the world and it is therefore extremely hard for US equity managers to outperform.
Consequently, RMBMM sets a lower performance benchmark for US equities than for, say, Japan, where it is easier to do well. The group uses different manager styles and approaches in order to iron out downside risk, but “it is not satisfactory to have individual funds which underperform their benchmarks,” he notes. “The multi-manager approach should deliver lower volatility, but we think this should not be at the cost of returns.”