Around five years ago, not many individual investors had heard the term ‘multi manager’. Today, it is a familiar expression. In fact, multi manager funds now comprise one of the investment industry’s fastest growing sectors. Research by the US firm, Cerulli Associates, claims that, at the end of 2002, the sector held assets of $463 billion worldwide. It predicts this will rise by $770 billion by the end of 2007 – a growth of 10 per cent a year.
This is not surprising however. Multi manager investments offer an all-in-one investment solution that combines diversification, active management and risk control in a simple tax efficient, cost-effective vehicle.
The term ‘multi manager’ describes the process where an investment adviser allocates appropriate parts (or all) of a portfolio to carefully selected, well researched specialist managers, while taking responsibility for asset allocation and fund manager monitoring. Multi manager funds bring together the expertise of various asset managers within one individual’s portfolio.
In the 1950s, Harry Markowitz proposed what became the foundation of modern portfolio theory (MPT). The central tenet is simple – with diversification, the same result can be achieved with less risk. Today, it is widely accepted that a portfolio should be diversified among asset classes and investment styles. A third level of diversification is becoming increasingly important – diversification across managers. This is where multi manager provides that essential final element.
In the past, most investors placed all their investments with just one investment manager. As the importance of diversification became better understood, they began spreading their investments over two or more managers. We have now come to realise that, no matter how talented they may be, different investment managers adopt different styles of investing.
Some styles perform well in certain market and economic conditions, but not as well in others. No single investment management style will deliver superior performance across all phases of the market cycle.
As the market moves to favour one style over another, investment returns are affected either positively or negatively. Therefore, investors need to ideally diversify across a range of managers (instead of just two or three) who use different investment styles. Using a multi manager approach means that no matter which asset or style is in favour at any given time, the complementary blending of managers can reduce your risk and help provide more consistent returns through all kinds of market environments.
Besides diversification, the complexity of fund selection has also helped make multi manager investment popular. Selecting the right mix of funds to achieve your goal is no easy task. For a start, it involves a lot of research (a vast number of funds are available in the global market place) and you need to trust yourself (or be very lucky!) to make the right decisions. The abundance of managers, investment styles and asset classes makes investment decisions increasingly complex and harder to make informed and appropriate choices.
If you are unsure which funds to choose, multi manager funds can be the ideal solution. It’s an excellent way of spreading your investment risk without the confusing and time consuming task of individual fund and manager selection.
More and more investors are beginning to appreciate the benefits of multi manager funds. The benefits include:
• In depth diversification
Your investments are spread across a wide range of funds. By simultaneously owning various funds under one roof, you effectively have your hands in many pockets at the same time, which reduces the risk.
• Risk management
The spread of investment talents helps reduce risk further. Multi management is a risk-aware investment programme, one that is built for long-term consistency.
Multi manager funds are designed to make the investor’s life easier. Teams of specialist investment managers are packaged together in one fund. It would be very difficult to get the same exposure to such a range of styles and expertise by yourself.
• High calibre investment management
You will have access to the world’s leading fund managers on an actively managed basis. The aim of any good multi manager provider is to seek out the best investment management talent from around the world, to monitor them and continually reassess their ability to produce the best results for investors.
• Peace of mind
The multi manager process gives you confidence to invest long term. It avoids the temptation of speculative investment and performance chasing, which are high-risk strategies.
• Consolidated reporting
Another aspect that makes your life simpler. You will receive one regular report (usually every six months), instead of multiple reports from different managers and/or companies.
• Tax efficiency
In today’s world, where the taxman is after every penny he can get, having a tax efficient investment vehicle is obviously attractive. Funds held in a multi manager investment can be bought and sold, without incurring any Capital Gains Tax (which you would have to pay if you bought and sold funds individually). You can also place these investments within a Personal Portfolio Bond, which acts as a ‘tax wrapper’, making your investments even more tax efficient.
There are two main multi manager categories. Fund of funds, which tend to invest in retail funds with pre-set objectives, usually with higher charges than the alternative of a manager of managers approach, which invests in equities or bonds through individually appointed investment managers. The manager of managers approach is the most efficient form for individual investors.
The recent growth in the multi manager sector is testament to the fact that they offer a viable practical solution in today’s complex investment climate. They offer diversification and access to expertise, professional knowledge and analysis. The multi manager principle offers an easier entry into the world of equity investing for anyone who thinks it’s time to move on from savings accounts, but is wary about taking too much risk. This process is also suitable for more experienced investors looking to improve their portfolio construction and reduce risk without reducing the potential of returns.
If you would like to invest and consistentlyutilise and monitor the best selection of investment managers, I recommend that you discuss the multi manager process with your adviser.
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