Over the past decade, the awareness and popularity of multi-manager funds has risen significantly and now accounts for a substantial proportion of the assets under management in the Investment Management Association sectors.
‘Fund of funds’ and ‘manager of managers’ have traditionally been the two approaches used to run multi-manager funds, but in more recent years, a third approach has become increasingly popular – the hybrid approach. This approach to multi-management combines the best of the two traditional approaches to achieve an optimal blend of investment talent that can deliver numerous benefits to the customer.
One of the key benefits to both advisers and customers is the ability to outsource the fund selection process to experts in the field.
It is difficult enough choosing funds for clients when there are thousands of funds available in the market, but selecting the right blend of funds takes investment knowledge and skill. Furthermore, continuing to monitor each fund to ensure they remain appropriate takes time and resource, which is increasingly in short supply as the RDR looms.
There are also occasions where there is no fund in the retail space that meets a client’s specific needs and a bespoke approach is needed. An asset manager that is able to negotiate segregated mandates can provide access to fund managers not normally available to retail investors and provides greater choice.
A hybrid multi-manager approach allows advisers to outsource fund selection to a specialist who can identify, build and maintain a portfolio of the best investment talent out there, whether in a retail fund or accessible only via a segregated mandate. All this is combined into an accessible and complete investment solution for clients.
Another key benefit of hybrid multi-manager funds is the diversification benefits they offer. At this year’s Multi-Manager Forum, 65 per cent of advisers indicated that the diversification benefits that multi-manager funds offer their clients was one of the key factors in them increasing the use of these funds.
A hybrid multi-manager fund not only typically offers higher levels of diversification than a single manager but also than regular fund of funds and manager of manager funds. By spreading investments across a number of funds and mandates as well as asset classes, a hybrid approach typically has its risk spread over a far greater variety of stocks and shares. Also, by blending both retail funds and segregated mandates, there is a better chance of achieving a diversification of investment styles, which can help ensure the fund is well suited to a variety of market conditions. All these factors can help reduce risk in a client’s portfolio.
There is a notion that multi-manager funds are expensive to invest in. However, if a client was to invest in these funds or mandates individually, the overall cost would be considerably more expensive due to the lack of buying power when compared to a multi-manager.
Finding the best managers and providing access to these managers should form the foundation of any good multi-manager fund, and this is what a hybrid multi-manager fund aims to deliver. With the numerous benefits, hybrid multi-manager funds are an ideal solution for both advisers and clients in a post-RDR world.
John Ventre is portfolio manager at Skandia Investment Group