The term, ‘jack of all trades, master of none’ has never had so much relevance to the European asset management marketplace as it does right now. And if anyone should know, it is those running multi-manager funds.
The downfall of ‘the jacks’ has hit nowhere harder than the UK fund management industry where the un-derperforming balanced managers have witnessed an exodus of pension fund clients to their specialist competitors. Among those have been the likes of Global Asset Management (GAM), Northern Trust Global In-vestments (NTGI) and Frank Russell. Between them, these three fund pro-viders run more than $50bn (E47bn) in global multi-manager assets. And while the European proportion of those assets is still quite small, at around $3bn, the potential for growth in the UK as well as on the continent is unquestionable and it is now not unheard-of for pension funds to specifically put out a request for proposals for a multi-manager mandate.
The specialist argument has been at-tractive universally, even though the UK pension fund market has been slower on the uptake than some of its European counterparts. But evidently it is not within the reach of all pension funds, for reasons of insufficient re-sources in terms of personnel and as-sets. As such, multi-manager vehicles have been sold, first and foremost, on the premise that they ‘ease the workload’ for the small and mid-sized funds and can offer asset-switching strategies for less cost and certainly less time than if funds were to do it themselves.
“There are enormous savings of cost, particurlarly hidden costs, and management time,” says Ken Ayers at Frank Russell. “The amount of time involved in running managers is horrendous. Few people do the numbers, but I think anyone who is involved with it knows the numbers are significant and it is, generally speaking, senior staff’s valuable time which is taken up with this sort of thing.”
“It’s an easier solution,” agrees Jo Ujobai at SEI Investments, which has recently set up offices in London. “There’s a co-fiduciary role, there’s one point of contact, so instead of trying to work with ten subadvisers or specialist managers, there is only one contact, one area of responsibility. And that makes reporting, information, and performance-gathering much more simple.”
This was the argument which led Russell to one of its first European pension fund wins for its newly formed Russell Integrated Asset Management. For the Compass pension fund in the UK, which recently awarded Russell a £100m (E150m) mandate, the balanced concept of investing had simply lost its appeal, but there were limitations in-house to how far it could diversify its assets. “It_was partly due to the Pensions Act and partly due to ongoing communications with the trustees. I think there has been a considerable amount of concern amongst the trustees as to the ability of active fund managers who consistently outperform,” explains Jim Roberts at Compass. “When all statistical evidence shows that all active managers tend to have a period of outperformance but no-one regularly can beat the game.”
Danny Sharp at NTGI sees risk diversification as the major pul-ling factor for pension funds in the UK that have experienced the balanced disapointment, largely due to those management houses in question re-stricting themselves to one style, he says. “The big bet, the macro bet that value is in favour as a style over the last couple of years would have wiped out many, many times over any consistent, small, cumulative gains from the managers that they employ and their ability to pick stocks.
“By avoiding style biases you are allowing stock-picking skills to come through and you avoid major bets away from the market.” NTGI’s confidence in the style argument is reflect-ed in its sales target - it expects to be running around £1bn in multi-manager assets by the end of 2000, nearly double what it has under management today.
The style argument carries more weight on the continent than simply offering an alternative to balanced – the continental European pension fund culture has been less inclined to balanced management in any case. Although global investment consultant Watson Wyatt is not offering pooled funds, its decision to move into the multi-manager market with the structured alpha approach is in fact indicative of demand, not only in the UK, for more structured asset allocation processes. It also signals a growing desire among pension funds to get as much added value as they can out of their investments, no matter what size their fund. Watson Wyatt is not surprisingly targeting the large end of the market with its segregated approach, but Russell, NTGI, GAM and US newcomer SEI are by no means limiting themselves to the lower end.
Frank Russell’s distribution partner, Société Générale Asset Management (SGAM), has been assessing marketing opportunities throughout the continent, partly fuelled by a growing interest in value and growth investing techniques, according to Bruno Roberti at SGAM in Paris. “Everyone is interested in the concept in Eur-ope,” he asserts, citing Belgium and Switzerland in particular as growth markets. “This is a highly innovative product and they want to understand exactly howthe product works as SG/Russell is not a fund of funds.” He adds: “Investors have become more conscious of market style cycles, that vary principally between growth and value cycles. The multi manager ap-proach enables investors to ride out market waves to obtain more consistent and recurrent performances.”
SGAM, within its agreement with Frank Russell, is waiting for authorisation from Italy, Spain, Switzerland, Belgium and Luxembourg to distribute the multi-manager funds.
David Duncan at GAM sees the multi-manager approach as paying dividends where a “disproportionate amount of research is required to do a proper job,” and that also applies to all sizes of pension funds. GAM is seeing pension fund interest from Belgium and the Netherlands and for emerging market mandates in particular. The resources required to research all the specialist asset managers investing in these regions means not only is a pooled fund route an immediate choice, but within that multi-manager techniques have been steadily gaining ground. “Our emerging markets multi fund has done tremendously well in that area because it provides something that even large pension funds want to have, but once they start to try and do it themselves they realise it is an utterly impossible situation,” says Duncan. GAM has a number of clients attempted to do it direct, at which he comments: “On a part-time basis it was a fruitless exercise.”
“Hiring the managers is the easier part of the process,” says SEI’s Ujo-bai. “It is once the managers are hired that it becomes difficult to manage the managers.” The process of making changes to manager set-ups should the decisions prove wrong, he says, becomes problematic for the pension fund. “It becomes a very backward process because it may take you a year to replace a manager.”