The multi-manager approach poses a range of issues for pension fund investors, says Debbie Harrison
While the trend towards multi-manager structures has been broadly welcomed, experts are still divided over several important issues. These can be summarised as follows:
q Can investment consultancy and asset management be effectively combined in manager of managers structures without giving rise to a conflict of interests?
q Do trustees help or hinder the implementation process?
q Is multi-style an essential component of a multi-manager structure?
q Is the passive core/active satellite approach more efficient than a fully actively managed structure?
Before examining these issues, it is helpful to refer to the terminology set out below.
A question of compromise?
One of the core problems with launching a manager of managers service in the UK in particular is that it clearly combines two disciplines which traditionally have been considered separate – and indeed incompatible – in the institutional pension fund market, namely asset management and investment consultancy.
Arguably, the investment consultant’s chief role is to advise on the objectives and overall asset management strategy. The manager of managers provider does not undermine this strategic planning service and in practice consultants may find that the appointment of a MoM structure improves their results as they can rely on a professional to implement the strategy.
What the MoM provider does do is to achieve and maintain a judicial mix of sub-managers who are hired and fired without the trustees’ or the consultants’ involvement. There can be no doubt, therefore, that the MoM model does affect the long- term relationship between the consultant and pension fund trustees because the consultant is no longer directly involved in the sub-manager appointment. This responsibility has been handed over to the MoM provider.
The most outspoken critic of an integrated consultancy and asset management model – as exemplified by Frank Russell’s services in continent Europe – is William M Mercer. Mercer has always argued that investment consultants should not act as asset managers. The firm recently sold the small manager of managers operation it inherited when it took over Sedgwick Noble Lowndes in 1998. The buyer – South African asset manager PSG Esher – has formed a new company, Escher UK, to market its MoM products in Europe. Mercer will provide the investment consultancy. In so doing it will maintain a key role in the growing MoM market without conducting a U-turn on what it regards as the integrity of its investment consultancy.
One of the big questions for both consultants and trustees is to decide whether the trustee ‘filter’ between the research carried out by the consultant and the actual management appointments adds to, or subtracts value from, the overall process. Clearly pension fund clients will differ in their views and requirements. MoM is undoubtedly a paternalistic service and is unsuitable for trustees who want a hands-on role in selecting and monitoring the asset managers.
However, MoM providers claim that for smaller funds which do not have the experience and time to work closely with the consultants on the implementation of the asset management strategy, the use of a professional is critical if the scheme is to avoid the often significant performance losses that result from ‘implementation leakage’.
As mentioned in the previous article, poor performance cannot be attributed purely to the incumbent asset managers – it is also a direct result of delays in implementing new management structures and of poor transition management.
This was well documented in a 1997 study of the Australian scheme for Lend Lease Corporation. The scheme already employed specialist managers on a multi- manager basis but the consultant asked to review the structure – Coopers & Lybrand (now PricewaterhouseCoopers) – found that outperformance was being lost due to the ineffective implementation of the specialist structures. The following year William M Mercer confirmed these views and reported that there were long delays in firing managers with organisational problems and that the fund suffered unplanned exposure to style biases.
Multi-style active versus core/satellite
Frank Russell, SEI and Northern Trust, among others, tend to favour a fully active multi-manager structure over the passive core/active satellite alternative preferred by Watson Wyatt and William M Mercer. The core/satellite approach is based on the premise that the majority of balanced managers will fail to beat the market on a consistent basis and that guaranteed market returns can be achieved at lower cost by use of index funds.
Under a core/satellite structure, typically the majority of the scheme assets will be invested on a passive basis, with the balance in an aggressively managed equity portfolio where the objective is to add a margin of outperformance. Studies in the US – where this approach is followed by approximately 30% of pension funds – have concluded that the optimum risk/reward position is achieved with a mix of 80% passive/20% active.
Proponents of multi-style argue that for a given asset class the appointment of two or more active managers whose styles are complementary, reduces style-specific risk and short term volatility.
Frank Russell, for example, argues that more consistent results can be achieved through the combination of multiple managers, each of which adopts a different investment style and focuses on stock selection as the key source of outperformance. This structure aims to capitalise on the strengths of different managers while minimising risk at total fund level. Multi-style, therefore, is used to neutralise style biases through diversification, to control the impact of unintended style ‘bets’ and thereby improve consistency of performance without sacrificing relative return.
By contrast, the company believes that tactical asset allocation and country allocation decisions are poorly rewarded and introduce risk to a portfolio. Therefore it tries to reduce the emphasis on these strategies when it builds portfolios of managers. The management of stock-specific risk is left to the asset managers.
Stamford Associates and Global Asset Management both take a flexible attitude to style. Some of their funds are multi-style, others single-style. SEIC and Northern Trust, like Frank Russell, are multi-style managers. It is not yet clear which direction Escher UK will take in this respect. Certainly the original Sedgwick Noble Lowndes ‘Superflex’ product was single style and at the time the SNL team argued that this was a simpler and lower cost model than the multi-style version.
Sources: ‘Investment Strategies for Pension Funds in Europe’ and ‘Competitive Multi-Manager Structures’, both published by LLP price £650/$1,105 and £695/$1,100 respectively. Tel +44 (0)20 7553 1515

Multi-manager terminology
Multi-manager is where more than one manager is hired to manage the assets of a pension fund. This could be anything from two balanced managers – a strategy adopted by many medium-sized pension funds – to a core index fund with satellite active specialists (core/satellite), an approach favoured by Watson Wyatt and William M Mercer, among others. The important point to remember about multi-manager is that although the consultant advises on the appointments, the trustees retain control of who is appointed and have a direct agreement with the asset managers.
Multi-style is used to reduce the risk of short-term volatility that results from style bias. This is achieved by appointing two or more managers for each asset class. The managers have different (complementary) styles so that the fund performance is maintained throughout the market cycles whether the flavour of the month is value or growth, small or large cap, pharmaceuticals or IT. Multi-style, therefore, reduces the opportunity for outperformance but smoothes the impact of market conditions on a fund’s returns.
Manager of managers (MoM) offers a range of sector funds - for example domestic equities, overseas equities, bonds and cash. The plan sponsor or trustees hand over to the MoM provider the responsibility for selecting, hiring, monitoring and firing the sector fund managers. The plan sponsor or trustees usually retain control of the strategic asset allocation or direct the MoM to act in accordance with the scheme’s statement of investment principles. The asset management agreement is between the trustees and the MoM provider – not between the trustees and the sub-managers.
MoM structures operate on two bases:
q A simplified MoM has a single manager for each asset class
q A multi-style MoM employs two or more managers for each asset class.