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Multi-manager view

With the recent reclassification of various IMA sectors, it is easy to forget what many multi-manager funds are aiming to do. The Smith & Williamson MM endurance balanced fund, previously in the IMA balanced managed sector, now resides in the mixed investment 40-85 per cent shares sector.

Most important to remember is that funds here, in our view, should still be “balanced”. There are various ways to do this but the most obvious is that top-down asset allocation is taken into consideration along with bottom-up fund selection.

Some multi-asset managers look to make big calls at either the macro or investment level in an attempt to catch short-term changes in the market but this is not an approach we favour. Our turnover tends to be pretty low (19 per cent for the 12 months to March 30) and we often reflect that the hardest part of our job is making our monthly factsheet commentary interesting although the benefits are that the frictional costs of trading are minimised. That said, it is important not to have too static an asset allocation.

The second aspect relates to the specific fund managers you select within the various geographic buckets. While some of our peers make more aggressive calls, we invest in a blend of manager styles to ensure that the portfolio is not too heavily focused on any one theme at any one time. Our blended approach is typified by the UK exposure where we hold the more defensive Invesco income and Artemis income funds and complement them with the higher- beta names such as Schroder UK alpha plus and BlackRock UK special situations funds.

This portfolio construction theme extends to the US (UBS US equity and Melchior North American opportunities funds), Asia Pacific (First State Asia Pacific leaders and Fidelity South-east Asia funds) and emerging markets (Aberdeen emerging markets and Atlantis China funds) allocations.

Another feature that should be considered when attempting to achieve a balanced portfolio is the type of product invested in. Many multi-managers look only at open-ended funds and exchange traded funds, meaning they ignore some gems that can be found in the investment trust sector, for example. Investment trusts, in our view, are ideal vehicles for asset classes which are not highly suited to the open-ended structure such as property, [Over the past five years, our investment trust exposure has primarily been to hedge funds. It is true that there is a greater layer of expenses entailed in investing in these but last year, in what was a poor year for equities, BH Macro, one of our holdings, saw its share price rise by 23.6 per cent. We believe investors should be happy to pay up for this kind of performance. BH Macro will invariably lag markets if they roar ahead but in a balanced portfolio, investors should not expect to have all constituents firing on all cylinders at once.

James Burns is head of multi-manager at Smith & Williamson

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