Talk to any investment professional about multi-manager and most have forthright opinions. However, such is the reach of the multi-manager approach- linking consultants, investment managers and pension funds- that few are willing to go on the record. In the UK, in particular, consultants still rule and are rightly considered the gatekeepers to pension fund assets.
In a similar vein, although there are plenty of fund managers fed up with the way multi-managers shave margins wafer thin, there are few who will go on the record and criticise the practice. As the multi-manager concept takes root, so progressively the hand that feeds feeds even more and biting it therefore appears foolish. Nevertheless, there are some willing to vent their considerable irritation off the record
One of the major criticisms from plan sponsors, according to one London-based fund manager, is never seeing their actual fund manager, only the manager of manager. The second criticism is that MoM providers usually do not have a view on asset allocation, instead they just go benchmark neutral.
Jon Bailie, managing director of institutional investment services at Frank Russell Company says they offer strategic but not tactical asset allocation. Of the latter he says they lack the skill and have no intention of building up any capability of providing it. “The most persistent source of added value, we find, is through stock selection… For a lot of pension fund trustees they’d rather have the consistency of stock selection as a key source of added value. So when we actually go about picking managers, we pick those who have good stock selection skills.”
Another gripe concerns the cost of multi-manager programmes. The same manager concedes that providers supply a complete package but that often there are still very healthy margins involved. “In some cases this has been as high as 80 basis points but you’re paying 80 for nothing more than someone organising a group of managers, something that an in-house pension fund manager could do for himself. Particularly, that is, if you have a trustee board that wants to go benchmark neutral and have half a dozen managers all with regional mandates covering the world. If they ask their pension fund manager to stay benchmark neutral- well that’s nothing more than many multi-managers are doing only you can do it yourself for half the price,” they say.
According to the manager, its not just the pension fund paying the price. “Multi-managers are offering a total package fee and they are trying to screw the manager down on the one hand while screwing down the custodian because it is an all inclusive service which absolves the trustees from making any decision whatsoever.” One senior London-based consultant dismisses this as common practice. “Everyone else tries to squeeze basis points, it’s just less attractive though when you’re on the receiving end and losing out,” he says.
As to why it has been so successful, the same manager attributes it to the existence of quite a lot of funds who have no pension fund infrastructure and therefore who see it as being an extremely convenient service. If the fund considers itself too small to do it then the offer of wholesale advice on which manager to pick and then reporting back the progress is appealing.
Says the manager: “It’s quite seductive but you’re paying more for it. Then what happens behind the scenes, is that sometimes the multi-manager provider separately leans on the different fund managers to provide soft commissions through their own brokerage arms or their brokerage services. Frank Russell for example, looks for about 25% of all transactions to be traded through them and very often fund managers have to make that kind of commitment.”
This is, in effect, exactly the same as commission recapture. The same manager questions whether this practice is out in the open. “It’s a totally valid question to ask your multi-manager provider whether they automatically report on what soft commission they are recapturing. The chances are that they don’t.” Wrong says Frank Russell’s Bailie. Yes they do redirect a quarter of trades but Bailie says this is a valuable service to the fund and that the clients are fully aware of what goes on. “We’re completely open about it it’s something that’s very positive for the fund because you’re putting back basis points,” he says adding that any excess goes back to the fund “in one shape or form.”
As for the conflict of interest between giving objective investment consulting advice and asset management, the manager says the fore runner of this was SEI. “You saw SEI’s consulting business simply haemorrhage when clients realised there was a conflict of interest. SEI went in to it knowingly and they wanted to hang on to their consulting business but, if it’s a toss up between consulting business on the one hand and manager of managers on the other, then it’s a foregone conclusion, manager of managers is much more lucrative.
“Russell came in later but nevertheless saw the success that SEI had achieved. Of course they are now in it and you have to ask how good their investment consulting is. In SEI’s case ultimately their investment consulting arm was much reduced but as far as we can see, Frank Russell has diminished their investment consultant resources. In fact the selling message is that if you get the investigative power of one of the world’s premier consultants.”
The notion that if the manager of manager spots a manager underperforming badly it will fire them and replace them immediately is seductive and, to a certain extent, valid. “The real conflict of interest comes in a different guise. In Frank Russell’s case, for example, when did you last see them do a search for a global mandate? When you hire Frank Russell, they tell you that the way to address the world is with regional portfolios and, nudge nudge, wink wink, we’d like to put ourselves on the shortlist. Now that’s a conflict of interest. Anyone who appoints Frank Russell to do any investment consulting and asset allocation work has already made a decision an that is to go down a regional route.”
Bailie says this is nonsense. “We never do that. It’s perfectly clear with the client. Everyone goes into this eyes wide open. So there’s no nudge nudge wink wink and it’s rather annoying that somebody can think that after so many years when we patently haven’t done that.” The likes of Smith & Nephew, who recently appointed Frank Russell as multi-manager and investment consultant, are perfectly happy. Although Frank Russell, and more recently Aon Consulting, have taken a lot of flack on this issue, the former’s volume of business suggests pension funds don’t take the supposed conflict of interest that seriously.
In fact, another London-based consultant employed by one of Russell’s direct competitors says that they are now predominantly considered investment managers rather than investment consultants.
The same manager says that although it might be assumed most funds considering hiring a multi-manager would be aware of these conflicts of interest, many probably do not. “The big players and the major funds probably know that but a lot of the small ones, they probably do not.” Again, the consultant disputes this and says that as the concept of multi-management gets even more coverage, so pension funds will grow more familiar with what they are letting themselves in for.
So although the service is one of convenience, it is overpriced yet the manager is unconvinced the price will come down. “I think multi-manager would offer two thoughts- one, they would be unapologetic about the costs. They would apply the argument that they are providing a service you cannot get yourself in terms of simply the cost of an ongoing review etc. and that’s probably fair. The other point they would make in their favour, and again there is a semblance of truth in this, and that is that they bring buying power in a single fund cannot.” Quite who benefits from this buying power was this unconvinced manager’s last query.

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