A pension fund could be forgiven for its confusion over the difference between a multi-manager fund and a fund of funds. In principle they offer the same objective – diversification of assets and less individual portfolio manager risk. And because of this, the growth of acceptance of fund of funds in Europe (though still shirked by UCITS and OEICs) has in fact paved the way for multi-manager techniques.
In essence, a fund of funds is a pooled fund investing in a number of other pooled funds and offers the simplicity of a single NAV but also means that the investor loses a certain amount of control over the investments. A multi-manager fund is a pooled fund that hires a number of asset managers to sub-advise on part of a pool of assets held within that structure. As such the multi-manager has increased overall control over the mandates it gives out to these sub-advisers and can specify the areas in which it wishes them to invest.
While investors cannot just compare on fees, multi-manager vehicles are seen to be run on a lower-cost basis. However, to motivate the various managers within a multi-manager mandate, performance fees can be introduced which reduces the cost advantage over fund of funds, according to Peter Straub of Swiss fund manager Fondvest. Fund of funds typically do not operate on such a basis, though there tends to be less transparency as the investor is not only paying an overall fee but also a fee to the funds in which the main fund is investing. The costs related to the fund (such as front- and back-end fees) oft-en mean that investors are less likely to change their asset allocation as often as they would in a multi-manager structure.
When a decision is made to replace a manager in a multi-manager structure this can be achieved internally within the overall fund, explains Teresa Araco at SEI Investments in Pennsylvania. “When we replaced Montgomery Asset Management with Morgan Stanley for a Latin American equities mandate last year, we were able to do so at significantly less cost,” she says. “Once the decision to replace was approved by SEI’s board, we gave the current list of holdings of Montgomery to Morgan Stanley. Morgan Stanley was then able to pick the securities they wanted from the existing portfolio and then sell the remainder in time.”
In more sophisticated asset classes, such as private equity and hedge funds, however, fees become less of an issue. This is when the choice of overall fund manager becomes significant. “The cheapest one could be the worst one,” warns Gio Puglia at Watson Wyatt in Zurich. This may also ex-plain why fund of funds and alternative investing seem to go hand in hand. On the continent, the fund of funds market seems to have carved a niche for itself in alternative investments and, while there are exceptions to the rule, multi-manager funds have stuck with more traditional asset classes.
In the Swiss market in particular, fund of funds have been the popular choice of investment vehicle for accessing hedge funds, by pension funds such as Nestlé, Unilever and ABB. But according to SEI’s Jo Ujobai in London this has largely been down to the fact that hedge funds do not typically make themselves available to multi-manager structures, as they would rather be invested in, as op-posed to sub-advising. “They are not interested in sub-advising other people’s funds,” says Ujobai. Rachel Oliver