Is experience the best teacher? Here we look at whether multi-managers who weathered the dot.com bust are faring better in the current crisis
In the run up to 2001, investors embraced the concept of multi-manager as a strong diversification play that left picking funds to the experts.
As markets rose, more multi-managers joined the fray. After all, how difficult could it be to group top-performing fund managers and earn a nice fee too? But multi-managers soon found there was more to it than picking names from a hat. Relying on past performance rather than solid analysis left many stranded overweight in tech stocks when the bubble burst.
The classic multi-manager play was Rory Powe's Invesco European Growth fund, packed with small and medium stocks. It ballooned to £3.3bn as investors chased performance only to drop by more than half when tech prices collapsed.
This time round, the focus of attention has been financial stocks. Improved selection and tracking has helped managers avoid the overconcentration perils of the past. Gartmore's Tony Lanning thinks greater communication and transparency has been key. He says: "It is true the fund group disclosure has got much better. A key part of our process and pitch is that we know the funds and managers inside out."
Few managers disclosed their entire portfolios a decade ago. Today, says Lanning, every manager provides at least a monthly breakdown and some are willing to do so even more often.
The Gartmore team analyses every portfolio on a monthly basis looking for shifts in funds and their behaviour. On top of daily risk, tracking error and beta analysis, a quant model develops 'snail trails' showing how each portfolio has shifted between sectors, capitalisations and country allocations. The model also flags up changes in manager style.
Lanning says: "The system acts as a warning signal. We then place a phone call or have a face-to-face meeting with the manager to get a better understanding of what has happened. Some shifts could be based on past history - a manager using their previous expertise in a specialist area, for example. Others require more interaction."
The big trend picture is all well and good. But the main characteristics of the last two years have been volatility and unexpected shocks. Gartmore's analysis ties into Bloomberg screens for instant access to individual stock holdings across the grouped portfolios.
The fall of Northern Rock and financial bond volatility are a case in point. Lanning says: "If you have spoken to any underlying manager in the last two years, they were all underweight financials. In fact, some were overweight when the problems began, others had the foresight to reduce holdings."
Gartmore's Cautious and Balanced portfolios were both underweight financials prior to the collapse of Lehman's. The active fund was overweight and all three have since increased their exposure.
For Jupiter's Merlin team, the downturn has not led to fund diversification for diversification's sake. Conviction is still pivotal for multi-managers hoping to beat the market.
John Chatfeild-Roberts, head of the Jupiter Independent Funds Team, says: "It is very important to both learn from your mistakes and to assess prevailing market conditions against history. As Mark Twain said: 'History may not repeat itself but it does rhyme a lot'. This approach has served us well in the downturn, during which period our overriding strategy has been to focus on investing with those managers in which we have the highest conviction."
First State Asia Pacific Leaders has been an increasingly important play in Jupiter's Growth, Balanced and Worldwide portfolios. It is up 15.99% over the last two years against the Asia Pacific ex Japan sector average fall of 2.8%.
For the Swip team, poached from Cazenove 18 months ago, developing legislation has brought added benefits. Bernard Henshall, head of multi-manager distribution, says: "The most significant move for us was the introduction of Ucits III. We came from a largely private-client background where investors are not interested in relative returns."
In the downturn, the ability to invest in newer strategies has paid off. Henshall says: "In recent months, funds of hedge funds have added value and that part of the portfolio has generated positive returns. Some traditional managers in equities and bonds have struggled as they had nowhere to hide."
The Swip team were early investors in Mark Lyttleton's BlackRock UK Absolute Alpha fund. They continue to support it and have also bought into Roger Guy and Guillaume Rambourg's Gartmore European Absolute Return vehicle.
Assessing and monitoring the manager skills and progress of multi-asset funds requires bigger research power. It also requires the will to dismiss newer, less transparent players who will not play the game.
Henshall says: "As long as we have the knowledge and the expertise in our team, we will invest. If not, or we have an issue with transparency or levels of reporting, we will walk away." The stance has led to Swip rejecting several fund of hedge fund opportunities of recent times as managers were unwilling to disclose all positions.
The team also counts on relationships and experience; the portfolio's underlying managers have an average industry experience of 23 years. Many perform well in poor markets and are careful not to participate in the full upside. The approach is gaining favour and secured £30m in advisory business last year. Henshall adds: "That experience is an advantage to us, it is almost part of the process."
Discerning increasingly strong outperformance is not easy. Just six of the fund of fund universe's 16 current top-quartile funds held similar positions in the falling market of 2002-03. Equally, five previous top performers have slipped to fourth quartile in the year to March 2009, according to Morningstar data.
In the Cautious Managed sector, the number of first-quartile funds has jumped from just one in 2002-03 to five today. Threadneedle Navigator Cautious Managed was the best multi-manager performer in both years. In 2002-03 it lost just 2.22% against a sector average of 10.31%. More recently it fell 5.34% against a sector average of 17.99% in the year to March 2009.
In Balanced Managed, more multi-managers are fourth quartile now than in the market's last bad year in 2002-03. The number of first-quartile funds has also declined, down from nine to five.
