Resources, access to key investment professionals and knowledge of financial markets worldwide are the keys to successfully implementing a multi-manager strategy, says Jon Bailie of Frank Russell Company
Frank Russell Company, one of the world’s leading investment management and advisory firms, is bringing long-term financial security to people across Europe and worldwide. Our competitive advantage is continuous, in-depth research of investment management and extensive knowledge of financial markets worldwide. Every relationship is based on or benefits from the Multi Asset Multi Style Multi ManagerTM investment approach pioneered by our researchers. This blending of investment managers and assets is at the core of our long-term investment strategy. With 20 years of experience in Europe, and over e8bn under management, Russell is the leading provider of multi-manager funds in the region.
Capturing specialist management
The concept that underpins our multi- manager funds is diversification, so that specialist expertise is captured within asset classes and geographical regions. An analogy is that of the decathlete competing against the single-event athlete. Is it reasonable to expect the decathlete to outperform athletes who spend their every waking hour honing their skills and bodies for a single sport? Decathletes may be outstanding all-rounders, but their physical training and skills can never match those of the specialist in any specific discipline. Similarly, investment managers who focus their research and resources on a single area of specialisation can reasonably expect to outperform the balanced manager who seeks to be expert at bonds and equities, both domestically and around the globe.
Multiple managers to neutralise style biases
While an increasing number of pension funds have embraced the concept of specialisation by appointing a single specialist manager to manage their exposure to an asset class, the return variability of individual managers within asset classes is often underestimated. This can lead funds to take more risk than they need to.
A single specialist manager will typically have a bias towards one investment ‘style’. The recent underperformance of so-called value managers, for example, has made pension fund trustees aware of the need for ‘style diversification’. Styles move in and out of fashion. The relative performance of different styles is difficult to predict and the impact of being over-exposed to one particular style can be significant. The solution is to combine complementary approaches so that broad style neutrality is achieved: a multi-style, multi-specialist manager approach.
Multiple managers to reduce risk
An additional benefit of employing multiple specialist managers is that it reduces a pension fund’s reliance on a single investment organisation or a single investment manager within an asset class. This reduces organisational risk. The asset management industry is sufficiently uncertain that no firm is safe from organisational turmoil. Size is no insurance against takeover, merger, cost-cutting or other organisational change that may upset the stability of the management team. Being able to predict and act on these changes is the key to successful implementation of the multi-manager approach.
Keys to success
Any firm offering multi-manager products must be able to demonstrate that it understands what drives manager performance. Using past performance or other historical statistics alone is like driving while only looking in your rear-view mirror!
Consistently successful investing is about bright people making good decisions. But most investors are unable to research investment management organisations to determine if they employ talented professionals and organise them to make good decisions. This research requires:
q Resources – the time and money required to interview thousands of investment organisations across Europe and around the world.
q Access – few investors have the scale to gain direct access to the key investment professionals at many fund management houses.
q Expertise – the knowledge, experience and analytical tools necessary to interpret the information gained during interviews.
Resources We devote enormous resources to researching investment managers. Russell employs over 50 specialist analysts around the world, dedicated to researching and finding the best investment managers.
Our analysts monitor over 2,000 investment managers and 6,000 ‘products’. They rank the products from a ‘buy’ to a ‘sell’. From the nearly 400 buy-ranked products worldwide, Russell uses about 100 in its multi-manager funds.
Access We provide manager selection advice to clients who collectively represent over e1trn in assets. Clients are some of the world’s largest investors, and include General Motors, Rolls Royce, BASF, IBM, L’Oréal, Shell and a number of governments and central banks. Russell analysts gain in-depth access to the key investment professionals because managers know we advise many of the world’s biggest investors on manager selection and manage over e60bn in our multi-manager funds.
Expertise Our analysts look beyond performance numbers and uncover the process, personnel, strategy and organisational issues that can affect future performance. Qualitative judgements are confirmed through rigorous quantitative analysis, using proprietary analytical tools to identify how managers add value and manage risk.
Managing multi-manager funds
We have managed multi-manager funds for over 20 years. We have learned that consistent performance is the result of efficient implementation. The keys to successfully implementing the Multi Asset Multi Style Multi ManagerTM approach include:
q Sophisticated portfolio management techniques When creating multi-manager funds, we combine managers with complementary investment approaches. Portfolio managers examine managers’ ‘fit’ in the fund from a wide variety of perspectives, such as style and capitalisation biases, using a variety of proprietary investment analytical tools. Russell monitors and reviews the performance and profile characteristics of all the funds and managers. This allows us to spot style changes and quickly make adjustments to the fund’s structure when necessary.
q Qualitative expertise Our investment team consists of more than 125 professionals, each playing a clearly defined role in the investment process. In addition to having a thorough understanding of the managers the investment management group collectively has an in-depth knowledge of the capital markets. Our portfolio managers have diverse backgrounds, with strong investment skills gained in fund management, investment banking or manager research. They ensure each fund’s construction and management reflect our collective knowledge about sources of risk and drivers of return in equity and bond markets.
q Scale Multi-manager structures using segregated accounts require significant assets to be implemented cost effectively. We provide clients with considerable economies of scale, allowing even relatively small pension funds access to large numbers of leading investment managers at competitive fees.
q Manager monitoring Investment management is a dynamic business. In-depth monitoring of managers is central to the effective implementation of our investment strategy. We closely monitor and constantly review the managers in our funds, and will make changes as necessary to ensure that the portfolio structure remains optimal.
Jon Bailie is managing director institutional investment services, Frank Russell Company in London