Fund Management

Multi-Manager: An Increasing Presence in High Net Worth Portfolios

Emma Rees Features Editor September 3, 2007

Multi-Manager: An Increasing Presence in High Net Worth Portfolios

Over the last five years, sales of multi-manager have increased 17 per cent per annum compound compared with 5 per cent for mutual funds in general and research firm Cerulli Associates forecasts that global growth of multi-manager sales will continue to outstrip conventional funds.

Over the last five years, sales of multi-manager have increased 17 per cent per annum compound compared with 5 per cent for mutual funds in general and research firm Cerulli Associates forecasts that global growth of multi-manager sales will continue to outstrip conventional funds.

“Traditionally equities and bonds were the accepted way to go in the UK space, using funds for extreme exposure geographically or situationally”, Mark Sherwood from Singer & Friedlander Investment Management told WealthBriefing. “Clients have become much more comfortable using funds for sector diversification and they are building up credibility and visibility.”

“Whereas 18 months ago, our asset base consisted of between 20-30 per cent funds, it now closer to 50:50,” says Cynthia Poole, director of relationship management and business support at Raymond James Investment Services.

Tracy Maeter, director, Wealth Management and Investment Group, HSBC Private Bank says that where historically some private clients have had an attachment to individual stocks and the names within their portfolios, “they have come closer to accepting a more institutional style of investing, using a broader menu of options.”

Singer & Friedlander Investment Management has £1 billion ($2 billion) of multi-manager portfolios of all sizes. It has five full-time people in fund research across all asset classes and geographical areas, traditional assets and alternatives, fund of hedge funds, commodities, property, specialist areas such as ethical investments. The multi-manager team also provides multi-manager capability to the rest of the department.

Launched in 2004, Barclays Wealth’s multi-manager offering is the largest in the UK with £10 billion ($20 billion) of assets. It uses a ‘manager of managers’ approach which offers a range of multi-asset class portfolios to suit investors with differing risk profiles:

“These are designed to squeeze the maximum expected return for each unit of risk”, says Bobby King, Barclays Wealth’s head of collectives. Mr King says that multi-manager is “simply a better way of investing money” and points to a number of advantages it brings over a segregated approach including the fact that investment managers can be changed without creating a chargeable event for CGT purposes and that strategic asset allocation is applied simultaneously to all investors within the portfolio.

HSBC Private Bank uses both fund of funds and manager of managers in addition to individual securities, structured products, and the full range of alternative investments, describing these as “delivery mechanisms”. It says it has the largest multi manager on the planet and one of the largest research teams with analysts on the ground in many emerging markets including Sao Paulo and Dusseldorf (covering Eastern Europe) so that it can “seek out new and better managers”.

“Multi-manager is available through different channels and is suitable for different levels of client sophistication”, says Philip Glaze, chief investment officer of HSBC’s multi-manager, HSBC Investments. “It is about finding out about client needs and packaging and devising the optimum vehicle to meet these needs. Multi-manager allows you to offer high quality at both the high net worth and mass affluent end of the spectrum.”

Whilst a multi-manager approach has tended to be used in smaller portfolios, manager of manager investing has crossed over from the institutional space, in particular pension schemes which have long understood the benefits of outsourcing investment decisions to professionals. Mr Glaze believes that to be successful in both worlds, retail and institutional, there is a need to combine the strengths of the rigorous research and resources on the institutional side with a the flair and focus on performance in the individual and retail space.

Narrowing down the universe of thousands of funds available across the globe invariably involves the use of quantitative programmes. However, firms emphasise the importance of a qualitative approach and getting out and meeting the managers concerned.

“Performance is a discreet process so it is important to determine which managers are likely to be successful going forward”, says Mr Sherwood. “We hold 300 plus meetings a year with fund managers. The qualitative questions you ask are more important than the quantitative, to determine whether success is repeatable. The numbers can look great, but it might be luck. We get under the skin of managers, what makes them perform and tick.”

HSBC says that it essentially looks for two things; either that the manager has an information advantage and either knows something that others do not or that it processes information that everyone else has access to better. A manager's process should look to exploit a clear market anomaly and this anomaly should be enduring.

Mr Glaze believes that over reliance on risk-management systems creates a false precision as such systems can provide more comfort than they should. “Risk has many faces and you are never going to cover them all by using a risk model.”

Barclays Wealth’s Mr King says: “Ultimately our goal for each asset class is to select a mix of investment managers that provides potential for market beating returns, whilst limiting risk by ensuring the strategy is not over exposed to any particular style of investment.”

Cost is a criticism often levelled at the multi-manager approach, but the firms WealthBriefing spoke to emphasised that as long as they delivered performance, pricing should not be an issue.

They also made the point that managers could often obtain funds at institutional rates, meaning that clients could hold bespoke portfolios, overlayed with asset allocation expertise, and talk to someone, for little more than the price of putting a DIY portfolio together themselves through a fund supermarket.

“Our managers target the lowest possible costs for investors and we very much support the use of institutional share classes, where investment managers can add value by gaining access to a lower annual management charge than is available to individual investors”, says Ms Poole. “Where managers buy retail funds, the manager has the option to rebate any applicable ‘trail’ commission back to the client. In addition, we can often gain net asset value terms with fund companies.”

“It is the after fee returns and how they have been achieved which are of interest to clients”, says Mr King. “Multi-manager is more expensive than a vanilla single manager option, typically in the region of 30-40 basis points more expensive, but what a client receives is a dynamically managed portfolio, rather than just a collection of individual funds.”

The approach is increasingly becoming accepted as a basis for managing high net worth and ultra-high net worth client portfolios. However using multi-manager for private banking clients necessitates a higher degree of tailoring than in the mass-affluent and retail space.

Singer & Friedlander stresses that clients are not forced down one route or another, that multi-manager is not considered second class or for smaller portfolios and that multi -manager portfolios work alongside a segregated approach:

“We are pragmatic not dogmatic,” says Mr Sherwood. “We create bespoke portfolios using individual funds and every client is different and gets the same attention. It is not an industrialised process.”

“Sitting at a lower level to the multi-asset class portfolios are a wide range of single asset class funds covering major markets both in the equity and bonds space. These provide the building blocks for investors and advisors looking to maintain control over the portfolio from an asset allocation perspective, whilst seeking to access the knowledge of our manager research team”, adds Mr King.

Ms Maeter says that initial contact with the client is key to understanding what their real tolerance to risk is - how willing they are to tolerate declines in their portfolio if markets are down 20 per cent:

"Private clients have unique and interesting perspectives on risk/return and we try to blend both investment strategies and implementation structures within a portfolio to ensure the risk profile is correct. Typically in the private bank we use a core and satellite approach where there is a core strategy at the centre tailored to the client’s long-term objectives and around that we create a satellite portfolio of tactical and alternative ideas, for example structured products, hedge funds, thematic positions, commodities or private equity. We will often draw upon multi-manger expertise where we are looking for a fund to implement these tactical ideas”.

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