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Great expectations

Simon Ellis, managing director of Fidelity International’s multi-manager business, sets out a procedure for selecting multi-managers on a similar basis to choosing other suppliers by looking for consistent delivery.

There is too much choice of multi-managers, a recent article in a trade magazine complained.

My first reaction was to wonder why this might be a problem when there is good reason for diversity? Reading on, however, the real issue actually seemed to be that proliferation in the supply of multi-manager products has not been matched by improvements in methods to differentiate between them. Certainly, the somewhat arcane – and increasingly irrelevant distinction between funds of funds and managers of managers – simply does not do the job.

It has often been said that advisers should use just one multi-manager to outsource investment decision-making.

But that has an air of permanence and potential provider bias that many advisers may find uncomfortable.

On the other hand, the explosion of the number of multi-manager funds now available may result in advisers having to research the whole market of multi-manager funds in the same way they used to research unit trusts, which you could argue defeats one of the objectives of using multi-manager itself – the effective delegation of fund research, selection and ongoing portfolio management.

How can an advisory firm concentrate on client issues and deliver high-quality products and services, without becoming bogged down in micro-managing the investments?

In this context, it would seem reasonable to suggest that clients with similar needs or attitudes to risk and reward could be given similar solutions.

This takes us into a newer world, where multi-managers become key suppliers and the adviser or his firm decides which providers to use for specific sub-sets of clients.

In this environment, the choice of supplier for each subset should be approached as a business decision rather than a product one and if that is the case, then the old unit trust model selection criteria is no longer suitable.

There is an exception if managed diversification in a tricky asset class is the objective but for something so central to the success of the advice, a different approach is required.

When an adviser firm is using multi-manager as the investment solution for broad segments of its client base, the procedure could be made easier by creating a supplier selection process that identifies providers which will consistently meet the expectations of the adviser and client for extended periods of time.

This approach would mean that questions become less about immediate past performance, costs and commission structures and more akin to the sort of criteria we all use when choosing key suppliers of business services such as office services, computer hardware, software support and so on.

Translating this into the investment world – do they have enough resources? Are they doing the right things to deliver consistent results? What sort of track record does the organisation have in supporting businesses like ours? What is their staying power and stability? What level of true commitment is there from the broader organisation? Will they support us properly? Can I trust them when things go wrong?

Multi-manager is becoming a central part of many advisers’ business and too important to rely on historic methods of fund selection.

In the same way, that they decide which fund supermarkets or wraps to base their business upon, now could be the time for advisers to consider whether these deeper criteria should be applied more commonly in the investment recommendation process for multi-manager funds.

As we have seen recently, manager stability, true corporate commitment and therefore reliability are not so easy to find.

Portfolios can always be switched to other providers and I believe advisers would prefer this to be down to a decision they had made themselves rather than being forced to because a perceived key supplier had let them down.

The problem is not there is too much choice but that the methods needed to make that choice have not kept up with market developments.

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