The multi-manager concept is not new but has taken on a fresh lease of life in the UK. Unlike some investment themes that have caught the imagination for short periods, however, I believe this approach to managing money is backed by sound business fundamentals and will therefore have longevity.
Key strengths can be identified. From a regulatory point of view, there is the role as a filter to underlying quality investment funds and the constant monitoring of these funds. Time management is at a premium and the benefits provided here are considerable, coupled with the ability to more accurately address underlying asset allocation. The efficient use of annual capital gains tax allowances is also compelling.
Of course, everything comes at a price and additional cost can appear expensive if referenced against markets offering lower overall returns. However, a 30 per cent return from markets in 2003 and a 10 per cent return in the past six weeks suggest that, while low returns may be the aggregate going forward, the cost of hands-on management in such an environment might be a price worth paying.
One weakness to investment via this route is the risk of over-diversification – or “diworsification” as one fund manager puts it. Too wide a spread can hamper returns by reducing exposure to better investment funds and increase confusion with clients when simplicity is a key attraction.
The opportunities for IFAs are enormous. Greater freedom to service existing clients and make room for new additions to the client list return control back to the idea of building a business. The opportunity is opened up for true relationship management to exist between the IFA and their selected fund managers. Sitting down for a quarterly or half-yearly review will provide IFAs with a focused and informed approach to decisions being made with regard to the client's investments.
Of course, there are threats from the development of this concept, not the least the fear that it bypasses the IFA's traditional role. This view may have had substance five years ago but I do not believe this is the case any more, outside bigger firms with significantly more resources. Just consider escalating PI premiums.
Addressing the ongoing suitability of the underlying investments, both in terms of potential returns and risk, meets not only the requirements of an increasingly regulatory society but also the original desires of the investing client. The delegation of these roles, with control exercised by the IFA, is very important in the decision-making process. The business management benefits, such as control of paperwork and commission flows, are obvious but I believe it is the flexibility of the multi-management concept that demonstrates its longevity and avoids it falling into the fashion trap.
It is a personal view that mistakes made in the investment industry, whether they concerned pensions, with-profits, split-caps or precipice bonds, were all based on the same structural flaw – a distinct lack of flexibility. At some point, all these products said to the client: “You cannot have your money back – at least not for a given period of time or without the payment of a given penalty.” It is this inflexibility that has often been a major contributor to the downfall of certain investments and it is this very flexibility that makes the multi-manager concept one which is here to stay.
Aidan Kearney is director of Artemis Premier Funds
GAM will reopen two multi-manager funds of hedge funds on October 18 and has added 17 new members to the team.
The GAM composite absolute return fund is a fettered fund of hedge funds that invests in a range of GAM's singleand multi-manager hedge funds. GAM diversity III is an unfettered fund of hedge funds that invests in funds such as the Cazenove UK equity absolute return and Henderson UK equity long/short funds.
Both funds were closed to new investors in March as there were high inflows of new money but many of the underlying funds in which GAM wanted to invest were themselves capped.
The new appointments, which span all levels within the multi-manager team, will enable GAM to identify new managers across various strategies and look at ways to invest more money with existing managers.
Minimum investment for the reopened funds will be increased from $5,000 to $25,000 to bring GAM in line with industry practice and make the funds more cost-effective to run.
There will also be changes to redemption terms, which will see the weekly redemption on the GAM composite absolute return fund switch to a monthly basis. Redemptions for GAM diversity III already take place monthly but a longer notice period will be introduced as many of the underlying funds require longer notice periods.
A spokeswoman says maintaining the existing redemption terms would result in a liquidity mismatch between GAM and the underlying fund managers. This would make it difficult for GAM to invest in the bigger, higher quality hedge funds.