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Multi-management View: Picking the winners from the losers

As we have all seen in the past few years, the number of multi-manager offerings available in the marketplace has grown rapidly.

In fact, the number of multi-manager/fund of funds available within the unit trust marketplace has increased by 260% since 2000, increasing from 64 funds to 167 funds.

Once the domain of niche players at the fringe of the asset management industry, the multi-manager message has now become mainstream. Many advisers have taken on board the benefits associated with the delegation of investment decisions, allowing them to wholly concentrate on client relationship management. A recent Cerulli Associates survey stated global assets in multi-manager funds increased 28% in 2003 and look set to grow at a compound annual rate of 14% until 2008.

As demand has risen, so has supply. I would hazard a guess, however, that a number of providers, which rushed their multi-manager solution to market, have been disappointed with the flows of money. And the reason? Well, the high-net-worth end of market tends to have bigger sums of money to invest – traditionally the domain of many an asset management group, and a great market if you can access it. However, advisers operating in this area also have the skills and expertise to create investment solutions and tend to be out of reach for multi-manager providers.

It is easy to get carried away with the hype surrounding the multi-manager area. Yes it can provide an attractive business proposition as well as an investment one. But we still see many advisers who wish to asset allocate and pick funds and will continue to do so for many years to come.

Having said that, I believe there is a significant portion of the financial adviser community who are wavering on the sidelines, unsure how and when to get into the game. Some of those who have been tempted have then been put off by cost. With some total expense ratios up to as much as 3%, who can blame them.

I’m sure there is still some way to go in terms of growth in this market. However, as we have seen with a number of multi-manager fund mergers, oversupply is a real issue, and consolidation, which has already started to happen, is set to gather pace over the coming months and years.

When choosing a multi-manager provider, advisers still need to do their homework to pick the winners from the losers. Undoubtedly, the providers must be able to show strong returns within sensible risk parameters. They should also look for providers who are focused on multi-manager as a core offering and who have the support, backing and availability of resource to enable them to invest in the skills of fund selection – a completely different skillset to that of stock selection.

Most importantly, I would argue that advisers should look to multi-manager providers with high-sales volumes because this allows them to obtain economies of scale with the fund managers. This gives them serious buying power in the market and access to some high-quality funds and managers that would be out of reach to others. Ultimately, this should result in them achieving out-performance against their peers and a cheaper product offering.


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