Multi-manager sounds the perfect solution for default fund investors. So what is holding it back, asks Paul Farrow
Talk to multi managers and you get the impression that they are making a huge impact on the defined contribution market.
Certainly taken at face value the multi-manager approach should be a suitable fit in the pension arena, particularly during a time when diversification is the buzzword in fund management circles.
By their very nature multi-manager offerings should fit the bill because they take the onus away from trustees and employees worried about choosing the right managers and getting asset allocation right.
Trustees in particular are under pressure, as they are responsible for the ongoing monitoring of funds and for dealing with underperforming managers as they deem fit. Many trustees are simply volunteers from the shop floor who lack the required investment knowledge and/or the time and resources to successfully choose and adequately monitor their investment managers. In a multi-manager arrangement, the trustee appoints a single entity to hire and fire the investment managers.
The multi-manager approach should be able to help trustees avoid making their own asset allocation calls. It should also alleviate any of the worries employees in contract-based schemes have because asset allocation calls are being made on their behalf without having to worry about switching funds.
John Lawson at Standard Life says: “Multi-manager funds should be the ideal pension investment solution for employees without advice. Multi-asset funds with appropriate diversification could be considered as the most appropriate solution for employees without advice. A robust solution would also consider how it ensures that it is managing the employees risk throughout their investment lifetime and into retirement.”
John Stannard, co-chair of global consulting at Russell Investments, says that a professionally managed investment programme such as multi-manager will, over a member’s working lifetime, avoid the worst aspects of the trustees’ problem of buying high and selling low.
A multimanager fund is a simple and available way of leveraging good research to “package” good managers together. This can substantially benefit the ultimate retirement “pot” and hence the retirement income
“We believe that through good research it’s possible to identify managers who can beat the market. For an active managers solution, hiring more than one manager increases the chance of success overall,” he says. “A multi-manager fund is a simple and available way of leveraging good research to “package” good managers together. This can substantially benefit the ultimate retirement “pot” and hence the retirement income available.”
In Stannard’s experience trustees and sponsors are becoming more aware of the “legacy manager” problem, where a recommended manager goes “off the boil” a complex administrative operation of change must be implemented across all members: sometimes requiring several levels of approvals. A multi-manager approach avoids that; since the provider monitors managers and makes changes behind the scenes, plan members retain their original holdings.
Another major multi-manager player, SEI, suggests that with the growing popularity of target date funds and diversified growth funds, “everyone” is now trying to be a multi-manager.
“Consultants and asset managers are both trying to select managers and then build diversified asset allocation strategies. However, the only one with the experience and resources to do this are manager of managers. The reason for their growing popularity is that the penny has finally dropped for members and consultants - asset allocation drives over 90 per cent of the returns,” says Ashish Kapur, European head of institutional solutions at SEI. “This means that clients are now looking for providers who are dynamic enough to not only change managers but able to turn risk on or off depending on the environment.
Not surprisingly SEI hopes to steal market share given that it has been implementing similar strategies for DB pension schemes for over two decades.
“One of our recent innovations has been to help trust-based schemes design more appropriate default funds such as those which target a pre-determined replacement ratio or pension level,” says Kapur.
Marcus Brookes at Cazenove also believes that, slowly but surely, multi-manager propositions are beginning to be used by DC schemes, although he admits that lifestyle defaults are still the fund of choice.
“Multi-manager funds are increasingly appearing as the default funds for many DC schemes recommended by advisers, as they typically offer exposure to multiple asset classes made up of investments in funds from leading fund managers across the industry,” he says. “Those with outcome based objectives are popular in DC schemes as they provide a performance objective most people understand and are satisfied that it is a sufficient target for their pension savings.”
Yet not everyone is convinced that multi-manager propositions are making an impact, despite the demand for diversification and the claims of the multi-managers themselves.
Fidelity admits that diversification for pension scheme members who are uncomfortable choosing their own funds, is crucial. It says that feedback from members in its DC plans tells us that individuals want reduced volatility in the growth phase of their savings but consequently we are seeing a shift from investing in global equities to multi-asset products with more “dynamic asset allocation”.
“However, most solutions are delivered by a single manager who may buy-in expertise for certain asset classes from other managers, but these funds are not true multi-manager products,” says Julian Webb, head of DC at Fidelity.
So if the premise of multi-manager funds stacks up, why are they gaining traction in the DC arena?
Not surprisingly, cost and performance continue to be the hot subjects when talk of multi-manager funds is discussed.
The major criticism with fund of funds is that they are expensive in comparison with conventional funds because of the double layer of charges - one levied by the underlying investments, the other for managing the fund. That cost is a major reason why funds of funds have struggled to make as big an impact as manager of managers.
Costs associated with multi-manager investing have become a real issue in the industry over the past year or so as the prospects of an era of slower and lower economic growth becomes more likely. With TERs for many funds between 2 per cent and 3 per cent, it will become increasingly difficult to achieve acceptable positive returns, concludes a new report by Defaqto, the financial analyst.
Lee Smythe at Smythe & Walter, the financial planner, says: “I’ve been looking at this a fair bit as we seek to streamline the investment proposition of my new firm. Multi-manager is an excellent proposition in theory for employees unable to access advice and indeed, even for advised solutions as advisers move toward more “contracting out” of the investment management for clients to specialist managers.
There is no credible evidence that multi-manager approaches are offering superior returns. In fact in the crucial “balanced” sector, among the best performing funds over 3, 5 & 10 years, they tend to be single manager funds
Smythe admits that the theory that in just one fund you will have access to a wide range of assets managed by - in the opinion of the “multi-manager” anyway - the best people for the job is appealing. But he says: “However, there is no credible evidence that multi-manager approaches are offering superior returns, in fact in the crucial “balanced” sector, among the best performing funds over 3, 5 & 10 years, they tend to be single manager funds, most notably Newton Balanced.”
There are suggestions that costs are starting to come down because some funds are adopting passive strategies via exchange-traded funds (ETFs). Kapur says: “Cost can be mitigated by introducing elements of passive investing in certain markets where manager added-value is more difficult to achieve.”
Justin Urquhart Stewart at Severn Investment Management says: “So far they (multi-manager) have not made much progress into either type of the DC world mainly due to the understanding and awareness of the improved structure of multi-manager by pension trustees and advisers. Plus, in the past, they have had a reputation for higher costs.
“However they are now getting traction amongst financial planners who really see their merit. That said, on the whole, it is difficult trying to persuading the pension advisers themselves that these are a sensible alternative.”
Most markets that are less than popular will be hoping the RDR; with its focus on costs (or how they are distributed) will level the playing field.
Russell Investments believes that company DC decisions are driven largely by two factors: administrative ease and cost-so the nature of the investment proposition can be a secondary factor. But it thinks that will change.
“As DC solutions evolve and competition intensifies, attention will shift to the investment solution, and the “governance” benefits of multi-asset, multi-manager solutions will generate increasing interest,” Stannard adds.
That said, many intermediaries are looking to effectively become multi-managers, adding value through blended investment solutions. Competition for offering the best diversified proposition will be fierce.