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Storm watching

Demand for multi-manager products is set to explode as volatile markets lay to rest the concept of the one-stop manager, according to research company Cerulli Associates.

Many groups have quietly conceded that they cannot be all things to all men in all asset classes. The study suggests there are 512 global players in the multi-manager arena, with a prediction that this will grow to over 700 in the next two years.The corresponding asset base is forecast to increase from $500bn to $800bn, which Cerulli feels is conservative.

What drives acceleration in the growth of the sector? There are probably three key factors. First is the realisation that no one manager can be all things, especially in volatile global markets. Second, consumer demand for mutual funds is growing as governments effectively privatise pension provision. Third, increased information flows provided by the internet are making individuals realise that self-selection is not as easy as it appears.

This has led to what management consultants would call a classic forming, storming and norming effect taking place in respect of multi-management.

Arguably, the sector is now well established, with the last five years seeing a proliferation of product offerings. Multi-management teams are achieving almost as much of a cult status as their single manager counterparts. However, recent acceleration in turnover of single fund managers and multi-manager teams would suggest we are well and truly in the storming phase. This is evidenced by associated activity in the search for market share, product positioning and investment management talent.

This has led to a number of new market entrants, with little or no experience of manager selection, which purport to offer best-of-breed solutions to unwitting investors. They are ending up with one-size-fits-all solutions which compete on price – not quality – with the same offerings from other distributors. The result is a more confused consumer with less idea of the differences between fund of funds and manager of manager offerings.

This storming phase is additionally characterised by an increased bidding war for single fund managers (every investment house needs one killer fund) and multi-manager teams. Stark evidence of this can be assembled using the search facilities on the Morningstar database. Filtering searches by length of tenure shows that only 17 per cent of managers have a tenure in excess of five years while 34 per cent of managers have loyalty of only a single year. This means there is a turnover of a third of fund managers on an annual basis.

Another aspect of the storming phase is the underlying debate between manager of managers and fund of funds. In reality, each has its merits and is appropriate to different types of clients, depending on asset size, investment objectives and risk profile.

There is also debate over the balance between quantitative and qualitative assessment processes. Some product providers sit at either extreme although there is a greater tendency to base manager selection decisions on purely quantitative models. However, those who have a good degree of experience of manager selection gained over many years enjoy quality air time with fund managers and are better placed to make consistently good qualitative judgements. This is likely to continue through this period of high manager turnover and corporate activity.

This phase is likely to continue over the next two years, fuelled by ever increasing marketing hype raising the general level of awareness of multi-management. Only after this period will the norming phase become self-evident as the ability of firms which really deliver in terms of performance becomes apparent.

However, certain other aspects will need to be given attention, in particular, the ability to compare multi-managers within specialist multi-manager universes. Ultimately, further distinction between fund of funds, manager of managers and even hybrid products will be necessary for proper comparisons to be made.

So, fad or fundamental change? There is no doubt that there is a certain element of fashion in the hype surrounding multi-managers. However, the storming phase is being driven by some very strong influences which would suggest that multi-management is set to become a norm in portfolio management.


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