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Carry on NURS

dvisers have been warming to the idea of multi-manager. This has been partly driven by regulation but the number of offerings, the variety and skill sets of multi-managers have come along way over the last few years.

ANew powers have been given to multi- managers following the Coll directive, including the introduction of the Non-Ucits Retail Scheme, which allows retail investors access to unregulated investment funds. This means multi-managers can introduce commercial property, hedge funds, private equity to the traditional mix of equities, bonds and cash.

Why bother? Well, diversification reduces volatility efficiently as the volatility of a diversified portfolio is less than the average of the volatilities of its component parts. In statistical terms, this effect is due to lack of covariance, the smaller the covariance between the two securities, the smaller the standard deviation of a portfolio that combines them.

Having managed money in the last bear market and defended the portfolios with as much cash, bonds and gold as trustees would permit, we would have given anything to have had the flexibility to invest in bricks and mortar or hedge funds with a short-term bias.

It does not feel like we are about to enter an equity bear market but complacency is a dangerous thing and when you see volatility indices such as the VIX close to all-time lows and then see investment guru Warren Buffet sat with $40bn in cash, you cannot help but feel that you need something other than just equities in your portfolio.

Structured products may come to the aid of the multi-manager, as it is now possible via the notes issued by the likes of Barclays Capital to buy products that deliver the exact profile of return you require. For example, we are a little nervous about the US equity market. Now we can effectively go short of the markets and it is possible to buy a structure that is 100 per cent capital-protected (unless the market rises more than 30 per cent) and will go up by 2 per cent for every 1 per cent the S&P 500 falls.

Just as it may have seemed the work of the IFA was about to lessen by outsourcing fund selection to multi-managers, it again has to increase, as the research needed to find the right multi manager has picked up in the wake of the ever increasing variety of product offered. Our hunch is that multi-asset class investment under the NURS structure is the future for multi-managers as efficient diversification within a portfolio can enhance returns and reduce risk.

Tom McGrath is fund of funds manager at Miton Optimal


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