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Multi-Manager View

The wisdom of taking bets on asset allocation is a frequent topic of conversation with financial advisers.

We take the conservative view that the neutralisation of asset allocation risks is the most appropriate approach for our products and market.

If a multi-manager is taking big bets on behalf of clients, there are three possible outcomes. If he consistently gets them wrong, he will detract a great deal of value from clients&#39 portfolios. If he gets some right and some wrong, he will add considerably to the volatility of the portfolio without increasing total return. Only consistent success will lead to greater performance without a corresponding rise in risk.

Our primary reason for not taking short-term bets is the consequence of getting them wrong. Aggressive geographic positions can prove costly. For example, some multi-manager funds have been overweight in Japan at the expense of Europe recently. Good news if, like 1999, Japan outperforms by over 30 per cent but less good if like 1997 the position is reversed with Europe outperforming by over 50 per cent.

Getting a bet on market caps wrong can also be painful. Think of the impact of being in small company funds at times when blue chips are in vogue (remember 1998 when the FTSE 100 rose by 17 per cent while smaller companies fell by 10 per cent) or style (there are the well documented and massive effects of being in value funds during the tech boom).

The second reason is that it is just so difficult to be right consistently. Returning to the Japan versus Europe example, there are an almost infinite number of variables which will determine whether Japan will outperform Europe over the coming months. An informed decision requires a manager to correctly predict government policy, consumer and business confidence, exchange rates, interest rate decisions and a host of other factors.

Anticipate all these issues correctly and you could still be undone by a single unpredictable event such as a terrorist event, a corporate scandal or a flurry of corporate activity.

We believe that our core skills at selecting, blending and monitoring world-class managers can deliver long-term outperformance.

We do not believe in betting our reputation, or an intermediary&#39s, or a client&#39s money on short-term tactical asset allocation bets, when the chances of repeatable success are so low and the potential damage so great.

Alan Durrant is chief investment officer at Skandia Investment Management


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