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The future of multi-managers

A few years from here, the UK financial advisory landscape is going to look a lot different.

Depolarisation, with its payment menu, the arrival of wrap providers, the enhancement to supermarket platforms and the reaction of life companies with their own administration platforms and open architecture around their products will all combine to shape this change.

But it is the explosive growth now and that is widely predicted for the future for the use of multi-manager investment solutions which is the key to understanding the change that is under way.

It is a change so significant that it will lead to nothing less than a repolarisation of the market into those who continue to operate a transactional business model, inc- luding picking funds, and those who outsource investment management portfolio construction and maintenance and focus on building advice-centred businesses. But I am getting ahead of myself.

Two years ago, MLC entered the UK IFA market with a range of manager of managers’ portfolios alongside its business consultancy arm Pivotal. Our team talked to IFAs about re-engineering their businesses, building sustainable client value propositions based on strategy and advice, building recurring revenue streams and, importantly, outsourcing invest- ment management. It is fair to say that, back then, not everyone understood this proposition. Today, it is very different. Most IFAs have been driven to accept the need to change their proposition to clients and their business model.

Consequently, there is a growing consensus that in order to release the capacity in their business to run an advice-centric, profitable model and provide a more robust investment solution for clients – the investment management function should be outsourced.

Part of the developing picture is shown by the growing support for supermarkets such as Transact and Fidelity FundsNetwork, a growth which follows a trend experienced in other markets such as Australia and US.

Here, the best advice businesses have come to realise that while embracing platforms introduces efficiencies, they still have the challenge of portfolio construction with all its time-consuming activities such as research and rebalancing, not to mention any potential future compliance issues.

It is no surprise to witness the growth of outsourced solutions such as manager of managers in these markets.

If IFAs are in the outsourcing camp and believe in multi-manager investing, what are their options?

Broadly, there are three main methods and it is critical that IFAs have a good understanding of these.

Discretionary management, fund of funds and manager of managers are all opt- ions offering a different level of science and sophistication behind each process.

Ironically, as IFAs change their business models, trad- itional product providers are frantically attempting to re-invent themselves to remain relevant. We are seeing life offices developing platforms, open architecture invest- ment products and changing their investment philosop- hies to include multi-man- ager investing.

When considering the future of this form of investing, there are some interesting aspects to consider. There are actually very few “specialist” multi-manager providers in the marketplace.

The vast majority of multi-manager providers are traditional fund managers or life offices which have added multi-manager options to their tool kit as the latest fad offering in an attempt to attract sales in an environment of flat capital markets.

On that basis, it is likely that when markets begin to strengthen, these same providers will move back to a focus of providing exotic single-manager funds in another effort to attract “hot” money. At this time, for these providers, multi-manager will be “that product that got them through the flat market period”.

The other group providing multi-manager options is small teams of people (often as few as four or five) who have broken away from a big fund manager to establish their own boutique multi-manager investment business.

Undoubtedly, some of these businesses will survive and flourish. Unfortunately though, when taking a proposition to the market to research, hire and manage the best fund managers from around the world, the harshness of a full market cycle will most likely reveal the challenges of achieving a global reach from a single office with a handful of staff.

From an adviser’s pers- pective, the best IFA firms, which are focused on the delivery of a sustainable client value proposition, spending more time in front of cli- ents, building value into the business, and, most important, providing the best solution for clients will continue to use a multi-manager investment solution.

Cerulli Associates predicts 14 per cent a year growth over the next few years in the UK and, if this prediction is correct, then IFAs will begin to put the various multi-manager options under the microscope.

It is fair to say that the general appreciation of the differences between fund of funds and manager of managers is not well understood.

IFA businesses in Australia, the US and, more recently, the UK, which have conducted thorough due diligence of these two approaches have concluded that manager of managers is a far more sophisticated vehicle.

As more and more of the best firms move towards an advice-centric approach, multi-manager investing will be a cornerstone of this new model. This will allow IFAs to reduce business complexity, spend more time with their clients focusing on the areas they add value and increase profitability and value in their business.

It is clear that multi-manager investing is here to stay and is set for a boom. This growth will bring further scrutiny on the sector and, as IFAs become more discerning, a flight to quality will occur which will lead to a rationalisation of providers. Game on!

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