The panel discusses rise of multi-manager funds and their prospects for the future
According to the IMA, net retail sales of fund of funds totalled £3.9bn in 2009, the highest ever recorded. The panel discusses the rise of multi-manager funds, how these funds are positioned today and their prospects for the future.
This week’s panel were Simon Wood, multi-manager, investment director at Swip; Tony Yousefian, chief investment officer at OPM Fund Management; and Roberto Demartini, associate director of fund research at Standard & Poor’s.
There has been a very sharp increase in the amounts of money invested in multi-manager funds recently, what do you attribute this to and is it sustainable?
Roberto Demartini (RD): There are essentially two reasons. On the one hand, investors seem to be a lot more comfortable with the idea of delegating their asset allocation to professional investors, and also to investing in best of breeds portfolios – which is really the big selling point about fund of funds and multi-manager.
On the other hand, the fund of funds world has developed considerably over the last few years, moving more towards solutions offerings, towards providing investors with lifestyle funds, with retirement planning or multi asset funds. So, we are moving more from a product to a solution.
This seems to meet investors’ needs in a far better way than investing in bog standard IMA asset allocation funds.
Tony Yousefian (TY): I would also say we think there have been massive changes within the investment market and in particular over the last five years. These changes warrant IFAs and investment managers to be much more up with events, and to ensure they can call the asset allocation decisions – so that they can take advantage of the changing investment markets.
That has had a big bearing on the amount of money we have seen flowing into fund of funds, and as that part of the industry continues to develop and mature, you will see proliferation of fund of funds. This leads to a solution-based fund as against off the shelf-type products.
Simon Wood (SW): From the IFA’s perspective, tougher markets over the last couple of years has made it very tough to pick funds, with some of our historically better-performing funds starting to struggle.
Also, multi-managers are so much more professional than they were five or 10 years ago. There are more companies doing it and the research we do is so much more in depth now. An IFA has to look after the clients as well, so it is a lot more involved.
Are traditional multi-manager funds losing influence now multi-asset funds are becoming increasingly commonplace?
RD: Yes, absolutely. We can talk around definitions but I think the point here is that until a few years ago, the multi-manager space was very much based around managing funds with rear-view mirror vision – looking at how the peer group was positioned and then positioning the portfolio accordingly. Multi-manager funds are becoming active asset allocators and that includes going into new asset classes.
We are seeing more funds investing in structured products, in private equity and property – which is probably where fund of funds managers have an advantage compared to asset allocators who invest directly into equities and bonds. They already do their research on individual funds – it is already part of their mindset.
Having said that, there are also considerable risks, because investing in different asset classes brings in different issues, in particular investing in less-liquid asset classes. 2008 is still close enough to remind us what can happen to performance in asset classes that are less liquid.
TY: We see the development of multi-asset funds as the next step from fund of funds. If you look at the legislation that has been put in place over the last decade, fund of funds were effectively multi-manager products but otherwise unitised. And they did not use any other asset apart from cash, fixed interest and equities in order to arrive at a typical old traditional fund of funds.
But as the legislation has evolved and with the onset of Ucits III powers, and you are looking at Ucits IV is, it enables multi-manager managers to employ different assets and asset classes within the fund of funds arena to achieve their objective.
We do not differentiate between a multi-asset fund and a fund of funds fund. We see them as the same principle, it is just the function of the fund of funds manager to employ different asset classes in order to achieve the fund’s objective.
SW: Our flagship fund is a multi-asset fund. We used to run it at our previous shop and are big fans of multi-asset, we have been doing it as a team since about 2001.
It gives you a much smoother return profile and it is just an extension of fund of funds as they used to be. But we think this gives you a much smoother return profile and are trying to get away from people slavishly comparing themselves to a benchmark, like the FTSE All Share.
Are most multi-managers hunting in the same pot of underlying funds?
RD: The traditional IMA asset allocation sectors are becoming less and less pure. They have some funds that, and in Tony’s fund as well, are truly multi-asset funds compared to some funds that are not multi-asset, they are still managed in the way that some fund of funds were managed five or 10 years ago.
If you look at those traditional fund of funds and not multi-assets, there is overcrowding. The average investor with some knowledge of the UK funds market can probably guess at least five of the top 10 holdings. That is a warning sign but those at the sharper end of the spectrum have already moved on and their portfolios are differentiated from the mass.
SW: It is just trying to get away from benchmarking against an individual market. Our benchmarks are libor plus four, that sort of thing. So we are trying to improve the real returns for people. We think that is a more sensible way of trying to achieve those returns. We do not want to be up and down with the bond and equity markets as you would have been over the last couple of years.
TY: With traditional fund of funds there is a danger one would end up with a similar holding by many investment advisers. We see it as our job to provide them with exposure to managers they otherwise may not be in a position to include.
Rather than using the star managers of today, it is our job to identify tomorrow’s star managers. Traditionally, these people are from smaller investment houses and boutiques. They do not necessarily have a similar budget as far as marketing is concerned so are not as well known to the wider investment community. It is our job to seek those people out and ensure we fully understand and appreciate their methodology, style and, more importantly, to ensure they fit in with our view of markets and expectations going forward.
How are your funds positioned at the moment and what has worked best for your portfolios over the past year?
SW: In the multi-asset portfolio, it would normally be split into thirds between equity, bonds and alternatives. Alternatives being hedge funds, property and commodities. Currently we are overweight hedge funds, because of the volatility in the market there is a good opportunity there. We are underweight bonds, particularly gilts. In equities, we are neutral and equity managers are quite cautious at the moment.
After a very good year last year, QE has to stop at some point and we are going to have to deal with the effects of that. Most of the managers we are with are pretty cautious and we expect quite a bit of volatility throughout 2010. We like hedge funds but not just long/short equity, we are also looking at currency and macro traders, where there are some fantastic opportunities.
TY: As far as last year is concerned, we were able to call the cyclical rally relatively early on, around April/May last year. We were structurally underweight UK last year, overweight US, very much overweight emerging markets and slightly overweight in Europe.
All of those areas did actually add value to our portfolios, we were able to catch the majority if not all of the gains within those sectors and we did have a sea change as far as our UK holdings were concerned, so coming towards from mid to end of Q4 last year we decided to back our profits as far as the UK cyclical players were concerned. We turned our UK holdings much more defensively and also took massive profits in the emerging markets exposure we had.
We were also able to add value as far as fixed interest is concerned, using our resources from the fixed interest fund we run, and also reflected that in the fixed interest content of our balanced managed. We were able to make handsome gains as far as fixed interest investment grade and then switch across to better quality high yielding debt.
We have remained bearish as far as sterling is concerned and our international holdings all did add value and we managed to control the volatility within our fund as well using short ETFs, where we felt the markets were overbought in the short term. We do use ETFs tactically in order to remove beta from our portfolio. And we also do go longer ETFs where we feel that tactically markets may well be oversold and we will be sort of short term banks.
