The global financial crisis resulted in the most challenging market circumstances for both investors and asset managers seen in decades. As market noise and uncertainty increased and weak links in the global financial system got exposed, the normal relationship between asset classes, currencies and areas of trade broke down. New potential bubbles were created as a result of the flight to safety while good investments had to be sold at deep discounts to their true value in order to meet liquidity needs. Individual investors panicked and abandoned their long-term investment strategies while asset managers had to show conviction based on the soundness of their investment models and philosophy. This unstable market environment tested the robustness of investment solutions in terms of the sources of performance and risk management that it offers investors. A well-structured multi-manager solution is able to effectively meet this challenge head on.
The multi-management industry is experiencing strong growth both globally and in South Africa. Multi-management is based on the concept that by combining different investment managers, you are able to capitalise on their respective skills and investment styles in constructing well diversified investment portfolios. Locally, the most common way for investors to gain access to multi-managed solutions is through collective investment schemes, either through fund of funds or segregated investment mandates. The main benefits relate to the broad range of performance drivers that can be accessed by multi managers, their ability to access sound risk management strategies as well as the convenience of using a single investment solution.
An actively managed fund facilitates the basic investment principle of diversification by investing in a range of asset classes that behave differently under diverse circumstances. Depending on the fund mandate, diversification can also be achieved from a geographic and currency perspective. In the case of multi-managed funds, investment style and strategies provide an additional element of diversification over and above those found in single-managed funds.
Multi-managers are also able to manage the other side of the performance coin effectively – investment risk. By using a sound quantitative and qualitative framework, a multi-manager is able to find the optimal balance between generating investment returns at the appropriate levels of portfolio risk.
Although the cost effectiveness of multi-managed solutions is still questioned, the benefit of economies of scale and bulk-buying puts the total cost of a multi-managed solution at the same level as most single-manager solutions in many cases. In addition, the convenience offered by a multi-managed solution needs to recognised as part of the equation when it comes to the total value offered to the investor. Being able to access the best managers across the asset management landscape as part of a single portfolio solution lifts the investment administration burden of not having to deal with multiple parties. Also, a consolidated view of the investment portfolio allows investors and their advisors to focus on overall financial planning requirements rather than the investment management activities. The constant monitoring of the underlying managers by the multi-manager in terms of mandate compliance, investment performance and strategic fit in the portfolio also reduces the risk of a loss of focus on the overall financial planning objectives by investors and their advisors.
Having access to the detailed investment holdings of the underlying investment managers enables the multi-manager to avoid non-value adding duplication in the portfolio as well as the ability to manage portfolio risk effectively. A do-it-yourself approach often results in the duplication of asset classes, stocks, sectors and investment styles. This leads to non-optimal risk return characteristics in portfolios. An asset allocation fund allows for a focused and coordinated approach as the portfolio manager has a holistic view of the investment solution. In the process of managing the fund, the multi-manager regularly rebalances the portfolio in order to ensure compliance with his investment mandate and intended investment strategy. This rebalancing offers the benefit of an automatic lock-in of profits as the portfolio is trimmed back on the best performing asset classes and managers while adding to the potential undervalued asset classes.
When selecting the appropriate multi-managed fund, the focus must be on matching the mandate of the fund, which provides an indication of the allocation strategies and risk characteristics of the fund, with the investment objective, risk tolerance and timeframe of the investor. An actively multi-managed investment portfolio, given its simplicity, flexibility and long-term benefits of asset allocation, offers an all-in-one solution as a core element of an investment planning solution. Although multi-managed funds might not always top the performance tables, the steady accumulation of growth through a more stable and balanced investment approach, will ensure that they will provide sound compound growth over time.