Fuelled by the growth of individual funds, multi-manager itself is also developing. But how is the investment structure evolving?
There have been changes afoot in the multi-manager sector recently. Looking at the sheer volume of individual funds on the market, it is hardly surprising that multi-manager is experiencing so much growth. But is there a difference between the type of multi-manager fund launching today and the sort of fund that was available two to three years ago?
Is there tangible value being added through the latest multi-manager funds?
Well, rather frustratingly the answer is both yes and no. Yes, there has been an increase in the range of asset classes that are available in the retail multi-manager sphere. Yes, this has resulted in the advent of the "accessible" multi-asset class fund. There are also new types of instruments being employed by multi-manager funds, to either short positions or deliver an absolute return.
It seems that many of the multi-manager funds being brought to market now style themselves as multi-asset (SWIP Diversified Assets and Credit Suisse Multi-Asset Distribution being two examples where the concept is in the title). There remains, however, a core principle of the multi-manager fund that needs to be seen as undiluted - that such funds invest in other managers' funds and hence are multi-manager.
What does this mean? In terms of the new multi-asset concept, it means that a multi-manager fund can be multi-asset in that it can invest not only in a number of funds run by other fund managers, but also by doing so, create a unique portfolio of asset classes that should be differently correlated.
A multi-asset fund, however, does not in itself have to be multi-manager. There may be some elements of a multi-asset fund that seek to gain asset exposure directly through a security or instrument and not solely through the use of other funds. The two can be quite unique and it is important that the two terms are not seen as necessarily synonymous with each other.
The difference between assets and funds raises an interesting slant on how multi-manager funds are managed. At the core of the distinction lies the question of from where a multi-manager fund seeks to maximise its returns. Does the manager believe that the asset allocation calls they make will deliver the best positive returns or downside protection? Or do they think that the performance of their fund is best served through the selection of great fund managers?
Almost all fund managers will see both as being instrumental, and in truth it does not really matter. All that matters is that the manager of the fund knows where he/she can deliver the best and most consistent returns. For those on the outside, however, whether they are advisers, clients or investors, it is important to understand how the manager is seeking to deliver the performance and the effect their approach or philosophy has on the possible shape of the returns.
To illustrate the different approaches, look at Credit Suisse's re-styled Multi-Asset Distribution fund, run by Graham Duce and Aidan Kearney, and Thames River's new Distribution fund, managed by Robert Burdett and Gary Potter, formerly of Credit Suisse. It is too early to say, or speculate, which fund will deliver the better growth, income or otherwise, over any period of time. That is not the point here. What can be said is that while both teams will look to generate returns from both manager selection and asset allocation, the Credit Suisse team are more into returns from asset class and the Thames River team focus more on the importance of manager return.
What both Credit Suisse and Thames River share, however, is a truly global reach in their search to find the best funds and managers to include within their multi-manager funds. While multi-manager funds have always looked to utilise the experience of successful portfolio managers in finding the very best funds, increasingly their searches and research are taking them in many different directions and locations.
In a sense this is because with the advent of Ucits III they are increasingly able to replicate what they do institutionally, within the traditional multi-manager space. There is more to the story than this, however, otherwise HSBC's OpenFund multi-manager range (launched in November 2006) would resemble institutional funds (which it does not). So why are multi-manager funds increasingly looking further and further afield to find that special fund?
Might it not come down to that old comment about fund managers in general? Namely, that very few of them are capable of actually adding alpha over the long term and that identifying these managers, while not easy, is certainly possible with good research.
Therefore, there is a need to look at esoteric and interesting funds and asset classes, because if everyone is holding Artemis Income, how is one fund going to be different?
This may all sound rather glib and that there is an awful lot more to the changing face of multi-manager funds than this shift to multi-asset and a shift to more unusual and less well known funds and managers. Multi-manager funds have always been able to offer that little something different from other funds. But, as multi-manager funds become more popular, so the arguments for and against become more simplistic.
The challenge for multi-manager funds is to continue to evolve and seek out new ideas and opportunities, whether that is in interesting new asset classes or that unusual US micro-cap fund.
Perhaps though, it may be the success of multi-manager funds that changes them the most. As funds become bigger they will find it harder and harder to take positions in the funds they most want to, and risk more and more unpopularity when they sell out of funds. Funds are some way from that yet, but things can move quickly. £100m funds can very quickly become £750m funds under certain circumstances.