Two arguments commonly used to promote multi management structures are one, that they give small schemes access to specialist managers and two, that by employing more managers, they are a good means of diversifying risk. These arguments rest on two assumptions though – firstly that specialists are special and secondly that managers are not correlated. Research by the WM company suggests that there is little point in employing numerous balanced or ordinary managers – employing managers whose styles are correlated is simply increasing the cost of doing a job that any one of them could do on its own.
All of which boils down to whether specialist managers are, in the crudest sense, any good and whether employing a number of them pays off. Does such a strategy produce outperformance and diversify risk? Another report Are Specialists Special?, again by the WM Company, concluded that on average and relative to multi-asset managers, specialists outperform even after costs are taken into consideration. “The use of active specialist management is accompanied by an implied increase in risk at the portfolio level. However, this does not necessarily filter through to increased risk at total fund level. This is because sensible combinations of specialist managers can provide markedly less risk relative to the fund benchmark than, say, a single balanced manager,” says the report.
According to Competitive Multi-Manager Structures, a report by journalist Debbie Harrison, multi-manager, multi-style funds are in fact not necessarily about achieving outperformance but are instead designed to reduce the manager specific risk and the short term investment volatility at an aggregate portfolio level. Providers of multi-management would agree in that they argue the appointment per asset class of two or more asset managers whose styles are complementary helps to reduce style-specific risk and short term volatility. (Critics claim that one manager per asset class is sufficient and that more than one style of manager may result in simply mimicking an index fund.)
Investment Manager Selection constructs portfolios by blending the different styles and diversification across the best of breed, a strategy that managing director Nigel Slade believes reduces risk as well. “We will look for the best growth the best value and the best theme manager, for example, and our view is that the combination of the best specialists will outperform the generalists and that has been our experience to date.”
Slade says the group is happier having more than one manager as it is difficult to predict which is going to perform best in the next 12 months. As for mimicking an index, Slade dismisses this by dint of selecting some of the best stock pickers in the market. “Rather than pick one generalist manager we would rather a blend of a number of the best stock pickers and blend the different styles and that diversification does not bring us closer to the index at all. It’s far less risky as well,” he says.
According to Sohail Jaffer, managing director at Premium Select, the litmus test in a bear market for multi-manager funds is can they really diversify risk and still be able to deliver performance either close to or better than the benchmark. Those, for example, that have been able to diversify into value management at an early stage have benefited as value has been in favour for the past 15 to 20 months.
While there is evidence that the use of more than one manager can spread risk, Jaffer says multi-managers are limited in diversifying risk as they are unable to short. There are, he estimates, four ways of doing so in a multi-management set up. One way is playing large, mid-size and small cap against one another. Second is balanced versus growth, third is having a sectoral rotation – i.e. a recent focus on financial institutions and utilities would have paid off. The fourth is the most obvious and that is really knowing which managers to pick and which to replace quickly. “It’s not a question of the quantity of managers it’s the quality of the manager and how one has blended the managers in terms of asset weighting given to the managers,” says Jaffer.
Steve Delo at the multi-manager Escher believes it’s possible to overstate the benefits of diversifying. Escher splits mandates between only two managers as it believes the lion’s share of the advantages of diversification are gained from introducing that first extra manager. “The moment you start introducing more managers there are only minor incremental advantages in doing so but they are outweighed by the costs and the administrative snarl ups that can occur,” he says.
There are advantages to diversifying but the flip side of the coin is that, by employing too many managers, you run the risk of creating a very expensive tracker. “It’s a case of sensible diversification risk, not just for the sake of it but because there are genuine, valid reasons and we split our funds between value and growth to take out the principal risk in equity fund management,” says Delo.
So, there is evidence that specialist managers can produce outperformance, albeit at an increased level of risk. If they are then packaged together carefully, overall risk can be less than the sum of the parts. WM’s report does, however, point out that as ever, sound manager selection is the ultimate determinant of relative performance. Sound familiar?

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