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‘Moms are cheaper than Fofs when changing managers’

Managers of managers Aon Asset Management and Northern Trust claim it is cheaper for them to change managers than it is for funds of funds houses.

Both companies run portfolios for retail fund management groups and employ transition managers to minimise costs and disruption to portfolios during a manager change.

Fund of fund managers have to sell the units they hold with one manager, which may involve paying a dilution levy, before buying into a replacement fund.

According to Aon Asset Management sales director Angus Duncan, the cost to the fund of funds of being out of the market during the transaction cannot be quantified.

In contrast, Duncan says managers of managers are likely to change the manager but not the mandate, so most of the stocks are likely to rem- ain the same.

Any changes will be carried out by an interim manager who will make overnight trades at institutional rates. This means the manager of manager remains in the market and benefits from the transition manager’s economies of scale.

Northern Trust managing director Tony Earnshaw says: “The cost of changing managers depends on how much of the portfolio needs to be changed. I have heard in conferences that it is about 3 per cent but I do not know where that figure has come from.

“We have been down to as low as 0.12 per cent although it varies. The changes we have made in the last three years have never been more than 1 per cent.”

Achieving the best asset allocation for clients is notoriously difficult but can make a significant difference in periods when there is a wide dispersion between the returns from different stockmarkets, asset classes, investment styles and market cap sizes. While there are some useful online tools available to IFAs which can help with long-term asset allocation choices, we believe that managing asset allocation over the short to medium term as well can improve returns. Using a multi-asset fund of funds portfolio is a good way of doing this.

To get an idea of how vital a focus on tactical asset allocation can be, consider what happened in equity markets last year. While the UK, continental Europe and the Pacific excluding Japan rose by between 21 and 23 per cent in dollar terms, the S&P 500 returned just under 11 per cent. There was also a sig- nificant difference in the performance of investment styles. Value investing, measured by the MSCI World Value index, was more successful than growth investing, measured by the MSCI World Growth index, returning 19.26 per cent and 11.21 per cent respectively in dollar terms. Finally, global small caps outperformed global equity markets by nearly 9.5 per cent.

However, it is arguable that the techniques used by IFAs to build client portfolios may not be best placed to optimise returns. Many IFAs use stochastic modelling to put together asset allocation strategies. These tools play a useful role in helping to match the mix of assets in a portfolio with the client’s investment goals and can forecast the impact of different investment scenarios on returns from various asset allocation models. However, it must be emphasised that stochastic modelling is focused on delivering a longer-term strategic mix of assets. It is not well placed to take full account of market conditions to allow short to medium-term tactical asset allocation.

For example, the view among many investment professionals is that it remains prudent to be underweight in US equities. Within our multi-manager portfolios, we are tactically underweight in the US but currently invested in the Legg Mason value fund run by Bill Miller. The unconstrained way in which Miller and his team manage money is demonstrated by an outstanding track record in all market conditions. We believe he is well positioned to outperform the S&P 500 index, as he has done in each of the last 14 calendar years.

A multi-asset fund of funds can help clients to benefit from tactical as well as strategic asset allocation opportunities. As well as ensuring that all the funds held in any portfolio are of top quality, the best multi-managers will seek to add value through effective asset allocation and risk management. The good multi-manager will constantly be making choices on behalf of clients about whether to favour equities, bonds, cash, property, private equity or hedge funds or whether to emphasise different regions. Similarly, exposure to risks such as investment style and market cap will be actively managed.

A multi-manager team is much more likely to deliver successful asset allocation if it is part of a wider investment management organisation and able to leverage the intelligence of other colleagues with different specialisations and ideas. For example, the Schroder multi-manager team leverages on Schroder Private Bank’s many years of experience in the field of alternative asset classes for its private client portfolios. Lee Freeman-Shor is investment development manager, multi-manager funds, at Schroders


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Independent view – Fiona Sharp

I watched the run-up to the general election with interest. I was curious to see which of the three major parties would deal with the financial issues that we, as IFAs, enc-ounter daily.


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