Multi-manager investing – specialists outperform generalists

My article a few weeks back, “The Keys to Successful Investment”, touched on the importance of diversification and how you can use multi-manager funds as part of your diversification strategy.
This week I take a closer look at the multi-manager approach, using a sporting analogy to explain how it works and how it can benefit you.
During the Olympics, one event that combines the qualities listed in the Olympic motto Citius, Altius, Fortius (Faster, Higher, Stronger) is the decathlon. Decathletes have to train for and be skilled at 10 different disciplines – quite a Herculean task. To win a gold medal, they need to have speed for the sprinting events, stamina for the distance events, strength for the field events like shot put and technique for events like the pole vault.
This is very impressive, but there is a group of athletes who outperform even the best decathletes. The individual event champions generally deliver far better performances in their area of expertise. At the London 2012 Olympics, decathlon gold medallist Ashton Eaton ran the 100m in 10.35 seconds. Usain Bolt took just 9.63 seconds in the individual event. The results of the other nine disciplines tell the same story. For example, Eaton threw the javelin 61.96m, while the individual event gold medallist achieved 84.58m. Eaton reached a height of 5.2m in the pole vault compared to the individual champion’s 5.97m.
The specialist performed better than the generalist every time.
You would not expect Usain Bolt to also specialise in the pole vault or javelin; specialists tend to be just that – specialists. There are many situations in life where a specialist performs more efficiently and delivers better result than a generalist, and this is particularly true in investments.
Just because an investment manager is skilled at managing UK equities, for example, does not mean he will be as successful at managing US or Japanese equities. Managers also tend to specialise in a certain style of investing, and these styles move in and out of favour according to economic and other factors. They will therefore produce impressive results in certain conditions, but below average ones in others.
Some investors rely on just one or two fund managers to look after their investment capital. However, wouldn’t you prefer to have individual specialists managing the various areas of the market your capital is invested in?
You can benefit from a team of specialist investment managers through “multi-manager investing”.
Today, most investors agree that holding different asset classes and different regions and sectors in their portfolio spreads risk. Multi-manager funds add a third, and increasingly important, level of diversification in your portfolio.
If you invest in a multi-manager fund, you benefit from a team of specialist managers, as well as diversification across multiple investment styles within each fund, with different managers looking after each style. As an example, let us look at the US Equity Fund offered by Russell Investments, which is recognised as a specialist in sophisticated multi-manager investing. There are nine specialist managers looking after this one fund (as at June 2014), covering a range of eight styles.
This complementary blending of managers and styles can reduce investment risk, regardless of what style is in favour, and help provide more consistent returns through different market environments.
Just like a strained muscle would hamper the decathlete in all his events, if prevailing market conditions are unfavourable to a single manager’s investment approach, performance may suffer. Multi-manager spreads risk as it lowers the investor’s dependence on the success of a single manager’s approach.
Russell Investments carefully selects each manager based on “best in class” criteria. This means that investors can benefit from the expertise of some of the world’s leading managers across their whole equity portfolio. It devotes considerable resources to identifying, hiring and managing some of the best money managers in the world.
In the world of athletics, individual champions can easily change from year to year. The same can happen with investment managers, but the multi-manager firm’s research is designed to find the next champions. Each of their funds is also constantly monitored, so that managers can be changed as and when necessary to improve performance for clients.
Multi-manager investing is not designed to attempt to win a gold medal in just one particular season. Rather, it aims to produce consistent results, season by season, over a long-term period.
It is a suitable investment approach for various investors with different needs. However, you should always discuss your requirements with a professional wealth manager, since your investment strategy should be targeted to meet your personal objectives and risk profile. Your investment planning should also be combined with effective tax-planning strategies to maximise wealth preservation opportunities.
By || Gavin Scott
[email protected]
Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com