Not all on the same hymn sheet
“Historically, pension funds gave all their assets to one manager. Then they realised that one manager could not outperform over every asset class. So they turned to specialists, and ended up with several asset managers, 10 or 12 reports, and a very complex structure. Multi-manager (MM) is the solution. It reduces the impact of administration but allows access to specialists.”
This is the rationale behind MM solutions, according to Nicola Horlick, former chief executive and co-founder of SG Asset Management, and now chief executive of Bramdean Asset Management, an institutional MM and fund management consultancy business set up last December.
“The real reason to use a MM product is in order to outsource fund selection and then put all your assets into the MM vehicle to give a very efficient structure and maximum economies of scale,” says Steve Delo, Institutional head at UK MM provider Escher, and chairman of the Association of Institutional MM Investors.
According to him, “MM makes so much sense for smaller pension funds that I can’t see why more use is not made of them. A fund of less than £50m (E72m) cannot get access to decent managers directly. They should either go passive, or active through a MM vehicle. Otherwise, they cannot afford effective active management”.
Access to high quality investment management for the smaller institutional investor is the backbone of the argument for MM – though opinions vary as to what is meant by “smaller”. “Funds of up to £300m should be attracted to MM. You need that amount to make stand-alone investment viable,” says Horlick.
For Derrick Dunne, co-chief executive of MM Asset Management (MMAM), across the board segregated management is perhaps only viable at around £700m AUM, though funds of £200m-£300m might do their own thing in UK equities and use single specialists or an MM provider for regional investment and other asset classes. For the pension fund of up to £100m, “it will cost a lot more to invest directly than through MM”, says Dunne.
Part of the MM appeal is its ability to offer bespoke solutions by using “building block” funds. Though it is true that the larger the pension scheme the more likely it is to go direct to fund managers, the MMAM view is that “MM is relevant to all schemes”.
Though MM is widely agreed to be an attractive solution for smaller schemes, its application across the board is not wholly accepted.
Delo is not entirely convinced by the “specialisation through MM” argument: the view that MM is an appropriate vehicle even for larger institutional clients, in order to access specialist investment areas or asset classes. “This is not really the raison d’être of MM. For pension funds of £100m to £200m or more, there is less of an argument for it,” he says.
In spite of this, Mercer senior consultant Ian Burton is seeing a growing specialist use of MM solutions. “We might shortlist a MM provider alongside traditional managers for a specialist regional mandate. It’s happening more and more, and we see this as the next stage of evolution,” he says.
The practitioners quote a list of reasons for choosing the MM route. Access to expert management is the most obvious: the best managers may be ruled out for smaller investors because of minimum entry size or cost. A MM provider may also be able to offer access to fund managers which are closed to new investors, but will accept further business from an existing client.
Spreading risk is high on the list of perceived benefits. “Diversification of manager risk in each asset class” is an advantage listed by Mercer’s Burton, though diversification should be accompanied by performance.
Delegation of the hire-and-fire process and the ability to monitor, select and make changes fast are further attractions. Under Myners, farming out investment processes to competent professionals may provide UK trustees with regulatory comfort. “If trustees don’t have the required skills in any particular area, they should outsource. This applies to small, medium and large schemes”, says Robert-Nicoud.
The extent to which MM can add value is bound to be an issue. Performance figures over the past year have been poor. Burton is cautious: “As with any form of specialist management, MM has a cost with no guarantee of delivery. It is a solution, but should not be seen as the Holy Grail.”
According to Delo, one problem
is over-diversification. “If you have too many managers the risk is so
well spread that you lose the reward
as well. The MM is then a closet tracker, which is poor value. The view at Escher is that you need fewer
For Horlick at Bramdean, “huge value can be added by managing managers properly – as opposed to putting money into a fund of funds and leaving it there”.
This comment goes to the heart of another issue: the distinction between funds of funds and managers of managers, and the need to enlighten the potential client base about this and other issues surrounding the MM genre.
“It is not well understood how MM works. Trustees don’t need to monitor as they used to but they seem reluctant to relinquish their old responsibilities”, says Steve Delo.
On the other hand, MM can be useful in areas where trustees’ confidence and experience falls short. “Some trustees may be comfortable with the theory of asset management but less so with implementation”, says Burton. The Mercer team sees encouraging use of MM as part of its role. “We think it is a very good solution for clients,” says Burton. “MM will continue to expand. It has a long way to go”.