Is a multi-manager arrangement good value when compared with more traditional forms of institutional management? Perhaps predictably, MM Asset Management (MMAM) director of marketing Nick Slater thinks it is, though it may not be absolutely the cheapest solution available.

Multi-management is likely to cost more than investing through an insurance company’s balanced fund, but there is a question of comparing like with like.

With the insurer, the client is accessing only one investment philosophy and talent pool. A multi-manager arrangement, by contrast, can open the door to investment managers which might not otherwise be available to a relatively small fund.

If it approached the manager direct such a fund would probably find that the investment minimum would be too high or the desired funds may not even be open to new business. “The small fund would get nowhere near the fee levels achievable through a multi-manager arrangement,” notes Slater. Segregated management might cost in excess of 1%, and the client would also need to maintain the staff resources to monitor the fund, he adds.

Patrick Disney, head of SEI’s institutional business in Europe, also sees himself as selling an approach. “Compared to traditional managers who say ‘here’s our performance – buy us’, we say ‘This is a better way

of doing things – buy us’. We don’t sell performance but we have to deliver it.”

Disney also makes the point about size of assets versus costs. “If you were hiring all the managers we hire, you would need £500m (€723m). The great advantage of manager of managers is that it is specialist management with a single manager – it is all put together, monitored and the reporting is done for you.” He gives the example of possible costs for a £50m invested 75% in equities and 25% in bonds. Such a client might expect to pay a fee of around 65 bps.

“That’s it – the whole fee,” says Disney. “There are some costs within the fund, up to a maximum of 10 basis points. These are NAV priced funds, so performance is net of costs.”

In practice, charges will depend on asset categories and the make-up of the portfolio. But “we would rarely charge over 75 basis points for a multi-assets strategy”, says Disney.

MMAM has standard, published fees because its funds are structured as OEICs. Its fee of 0.85% for equity funds is “negotiable according to size”, says Slater.

The majority of multi-managers use a manager of managers structure, and tend to be dismissive of fund of funds arrangements, which are in any case more usually associated with the retail market. Funds of funds are more likely to suffer from the effects of double charging, says Slater. “The umbrella FoF charges a management fee and so do the underlying funds,” he adds. “There are a lot of mouths to feed. The amount of fees to be paid will vary depending on the underlying funds – whereas with manager of managers, the overall manager takes on the risk that a change of funds will mean a higher fee.”

Not all multi-managers agree with this reasoning. Psolve, the multi-manager arm of Punter Southall, operates a fund of funds arrangement. “We try to negotiate the underlying manager’s charge down to a level where it would be no more expensive to invest in the fund even with our fee added,” says Andrew Drake, chief operating officer at Psolve Asset Solutions. In other words, if the fund manager charged 80bps to a client who invested direct, Psolve would hope to negotiate a charge of 50bps and add 20 of its own on top.

“We don’t always manage this, but that’s the principle,” says Drake. It is possible to get the overall bill to work out cheaper than if the client had gone direct, but this is more likely to happen with broader fund managers where the multi-manager is bringing a lot of assets rather than with smaller tranches of specialist assets in, say, Japanese equities.

Within the Psolve fund of funds product, an equity manager might typically charge 40-50bps. Psolve would add 15-20bps. There would also be a performance fee of 10-15bps subject to a cap.

Drake’s view is that in the UK there is not yet a sophisticated enough level of understanding about fees. “With pooled assets, you should look at TERs total expense_ratios as well as the management charge – though not everybody even agrees as yet over what the TER actually is,” he says. “It is less understood than in the US, where some funds can be almost twice as expensive if you look at the TER rather than the quoted fees.”

He does concede, however, that fund of funds may be more opaque than manager of managers, “though there is no inherent reason why one should be more transparent - or dearer - than the other”.

When designing its multi-manager product, Psolve decided that it could access the talent it needed through a simpler fund of funds arrangement, rather than by using segregated managers in a manager-of-managers portfolio. “Why,” asks Drake, “go through the hassle of going segregated?”

He points to the fact that funds are administratively less cumbersome and because they can easily be bought and sold, restructuring a portfolio is much less of a problem than when dealing with individual managers. “You shouldn’t underestimate the administrative complications of segregated arrangements,” he cautions. “People don’t realise how complicated it can be to move, say, from an equity to a fixed interest mandate.”

Such a move might lead to additional complications as regards cost. “If the fee you are paying to the fund manager depends on the amount of money you have with them, and then you move some of that money elsewhere, you could lose the fee deal,” Drake says.

In his view, a further advantage of a fund of funds arrangement is the ‘shop window’ effect, noting that the sort

of funds used in fund of funds are seen by their fund managers as a kind of public flagship for the group’s performance. As such, they tend to be run by top fund managers. As an example, he cites the Standard Life High Alpha pooled fund run by David Cummings. “He pays it a lot of attention,” says Drake. “It’s a big deal. That kind of attitude wouldn’t have been the case five years ago.”

Performance fees are a further issue in the more general discussion about charges. Even among the groups we spoke to, there were strongly differing views, and all different types of practice. MMAM does not use them and does not feel that they work in a multi-manager context. Psolve uses them routinely. SEI uses them in some situations.

“We would love to offer them but with pooled funds they can be difficult to apply,” says Slater. He feels that if the overall manager charged a performance fee MMAM, the overall manager, would have to pay one to the underlying manager as well. “You could get a situation where the overall manager has to pay a fee to an outperforming fund manager when the portfolio as a whole had underperformed”. He adds that performance fees are not widely used, and MMAM has “not had much call for it”.

“The money is managed in the same way whether there is a performance fee or not,” says Disney, who says he has “a few” clients who pay performance fees. “We will discuss it if a client is interested in it, but I decide in a business sense whether we want to do it,” he adds.

Psolve charges performance fees – which go to it, not the underlying fund managers.

Whatever the charging structure - and different styles of multi-manager offering as well as the complications of fees versus TERs mean that variation across the sector is inevitable - the feeling is that transparency with regard to charges provides an ultimate safeguard for the client.

“Most multi-managers are transparent. There is a perception that there is a double layer of charging, and it is all opaque. But in general what you see is what you get,” concludes Slater.