It is a cracking idea really – why play hopscotch on one fund when you can be automatically diversified into a whole range of funds and managers? The sudden growth in the multi-manager structures over the past few years has been remarkable, with new offerings springing up like desert flowers after a rainstorm and it will be interesting to see just how many survive the first flush of enthusiasm.
The logic of the multi-manager (MM) structure is undeniable but a level of caution, and even cynicism, is required when evaluating all the differing strengths, capabilities and weaknesses of all of the alternatives. What at first sounds straightforward soon becomes complicated by structure and language and, what could be a great advance for many intermediaries and their clients, might turn out to be not quite all that was expected.
The first issue that brings confusion is the basic understanding of the subset of MM into manager of managers and fund of funds. Having spoken to many at seminars, I have found it is only a minority that can properly define the difference and appreciate the benefits (or otherwise) to their clients. The simple difference focuses on the mandate of the managers – in the Fof you have a structure put together using other people's fund mandates; in the Mom structure it is the MM who is specifying the mandate to be run by the individual managers.
Why is this so important? The key issues are flexibility and cost. Under the Fof structure you have, in theory, a greater flexibility to trade your funds as necessary without being locked in, but at the cost of potentially higher management costs. Under the Mom structure, the accounts are run by individual managers and should, as they are not funds, be much cheaper but as they are not tradeable funds, you have far less flexibility. So which is going to be more suitable for your clients – and probably not for all of them?
The most important issue for me is that of transparency. Unfortunately, the MM structures can hide costs and charges. As there are two tiers of charges to Mom and Fof, the MMs are only obliged to disclose the top-tier AMC and not necessarily the TER and, worse, they are not obliged to disclose either the AMC or the TERs of the underlying charges. The result can be a significant difference between what the clients thinks they are paying and the actual costs.
One of the great benefits of the MM should be their ability to manage across all the main asset classes and to maintain an ongoing process of allocation but they all vary greatly. If you areunaware, it is sometimes hard to see this process in action and if they are actually covering asset classes from private equity to commodities, via the mainstream fixed interest, equity, cash and property classes. Then to identify how often this allocation occurs – is it a rarity of an annual or six monthly event or an ongoing discipline each month?
Independent MMs are heralded all over the market,yet how many are using their own funds and managers? In theory there is nothing wrong with using your own fund managers but it always raises the question of true independence – how many houses will really sell their own fund and buy someone else's? It is probably better that fund management is kept away – that way there can be no implied linkage.
MM can give intermediaries with much of the institutional discipline for investment that can provide tangible benefit to them and their clients. However beware; such benefits can be easily lost among the plethora of marketing hyperbole hiding high charges and rotten performance.
The good news is that you have never had so much choice: the bad news is that you have never had so much choice. Hose them down and find the squeaky clean ones, not the muddied, muddled multi-managers.