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Value judgements

Falcon Group investment strategist Andrew Boyett-Camp asks: “Where do multi-managers add value for money in outperformance and what proof do you have that you can produce the goods rather than simply mirror an index?” Skandia Investment Management head of marketing David Moor: “We add value by selecting world-class specialist managers. Our innovative model offers the benefits of holding funds and institutional mandates within a single structure, giving us the widest choice. By blending managers together carefully, we can add value to performance but, vitally, within strict risk controls.

“This process has been in place for 12 years and is proven to work over the long term. Our Oeic funds aim to deliver outperformance against their benchmarks over three-year rolling periods after charges – three years because shorter time periods are susceptible to the effects of a particular style or theme dominating.”

Insinger de Beaufort director Peter Fitzgerald: “Multi-managers should add value in manager selection, that is, identifying those managers with consistent above-average performance and by the subsequent combination of these managers in efficient portfolios. They should not attempt to add value by tactical or active asset allocation. If a multi-manager does engage in active asset allocation, they should spend the vast majority of their time researching global macro economic trends rather than fund manager research as this is going to be the driver behind their performance.

“We produce quarterly performance data showing our manager selection skills in each area (UK, Europe ex UK, US, Asia ex Japan, Japan, UK fixed income). This makes monitoring straightforward and allows for meaningful comparisons with other multi-managers.”

Credit Suisse Asset Management multi-manager service joint head Gary Potter: “First, we need to define what is value. To us, it is not only continually outperforming both the relative stock index and crucially the peer group but also what the fund of funds can do for advisers as a component of the investment solution, as a one-stop shop. With Fofs all regulation, compliance and admin is taken care of. There is ample evidence that the leading providers of Fofs have achieved value for money. For example, our CSMM UK growth is up by 4 per cent over the period since its launch against the FTSE All share index which is down by 7.1 per cent over the same period.”

Isis Asset Management fund of funds director Richard Philbin: “There are many ways that a fund of fund manager can add value for money and not just in terms of outperformance. Obviously, if a fund outperforms the average, the trail commission will be higher than the average, providing the IFA with a higher ongoing stream of income.

“We see fund of funds as a managed alternative to IFAs constructing portfolios themselves. By putting forward a number of managed situations, we can free up a lot of time for them. For instance, we professionally monitor, manage and change assets and asset classes to deliver consistency of return. We have full discretion (within certain limits), which allows us to buy and sell assets accordingly. The time taken, and the costs involved are much cheaper than an IFA could afford.

“Consider the time taken with a client, for instance, to change a number of assets that are not delivering what is expected of them while keeping a close eye on the asset allocation and then working it out as a time spent versus costs charged situation. By outsourcing to a fund of funds manager, the IFA can spend more time with clients or getting new clients, thus adding yet more value.”

Boyett-Camp asks: “IFAs are concerned that the fund of funds they select could shift risk parameters over the course of the investment. What resources/ checks do you have to ensure risk parameters are adhered to?” Moor: “A key focus for our 18-strong investment research team is risk control. Getting asset allocation bets, style bets and market capitalisation bets wrong can destroy value very quickly so we look to neutralise these bets within the portfolios.We have set precise parameters to control asset allocation, investment style and market cap weightings and keep our funds within closely defined ranges and we rebalance all portfolios on a regular basis to keep them in line. We are conscious that our funds should not shift risk parameters as IFAs need to have confidence that what they have recommended to a client remains consistent.”

Fitzgerald: “We do not engage in tactical asset allocation. If a fund starts its life with a 40 per cent equity/60 per cent bond split, this will gener-ally not change. This enables IFAs to control the risk of the overall portfolio as they know what our asset allocation will be. In extreme circumstances, the risk characteristics of asset classes can change. In certain circumstances we may therefore adjust the long-term strategic asset allocation of our funds.”

Potter: “This is a very important point. IFAs and clients need to have confidence and trust that the product they buy does what it says on the tin. We actively clarify what each of our funds seek to achieve and act accordingly, monthly monitoring all underlying funds to ensure we do not deviate from the stated objective, particularly in our managed funds, where asset allocation, fund selec-tion and portfolio consistency are crucial to delivering returns that meet client expectations.”

Philbin: “We have in place very strict risk/reward parameters within our investment portfolios and this has been designed consciously. We have developed an unique approach to filtering out funds that are not delivering consistent returns. This is known as traffic light analysis and we use colours (green, amber, red) as another way of saying buy/hold/sell. We use discrete time period analysis instead of cumulative. For example, if we were looking at three years of data, we would look at three 12month periods rather than the whole 36-month time period and see how consistent the fund had managed to get the return. We also look at performance, volatility, maximum loss, information, correlation and alpha. We have to have a high score on the traffic light analysis across all six factors. This keeps us honest.”

Informed Choice managing director Nick Bamford asks: “Why would an IFA pick manager of managers over fund of funds? What is the real difference to the investors?” Moor: “We think there are merits in each of the approaches so we innovated and built a product that can access both. Using institutional mandates allows us to employ managers on a bespoke basis, giving us far more control in portfolio construction. Assuming that you have the resources, (we have 18 analysts) access to daily trade data offers huge benefits in the manager monitoring process. However, we do not want to limit our universe just to institutional managers so we also have the flexibility to access the best retail-only managers.”

Fitzgerald: “IFAs should pick the offer that is most suitable to their business model and the needs of their clients. In Europe, the whole sector is just called multi-manager. It is really only in the UK that there appears to be a concern for segregated mandates or retail funds or institutional funds. Times have changed. Historically, Moms claimed to have an information advantage in that they could see all und- erlying holdings and trades. Today, many Fofs now have access to the same risk control and portfolio construction tools which may have been reserved for Moms. In summary, you should look at the objective of the multi-manager and its delivery rather than its legal structure.”

Potter: “The only time that you should pick a Moms over Fofs is if it is for a long-term pension fund solution which has asset liability issues or if you believe we are entering a strong bull market phase where index performance is more hard to beat. Since the turn of the millennium, so far Moms have generally underperformed Fofs – and by quite significant margins in some cases.”

Philbin: “There are so many differences between Fofs and Moms. Being a Fof manager, I am obviously going to promote this view but I will cede there are a few benefits of investing in the Mom route. For instance, charges are generally lower and control over the fund manager is greater as you dictate the mandate.

“But I feel these benefits are outweighed by a number of factors such as flexibility, taken from a number of angles. Fofs allow the manager to buy and sell a large amount much more frequently as the contract you have with the manager is much more flexible. There are also a number of fund managers that will only manage retail funds and will not enter Mom contracts. Mom funds are not very transparent either. There is no independent way of finding out what assets you actually own, as ownership is totally with the sponsoring house. When you buy an Isis Fof, for instance, we let you know how much of each underlying unit trust, Oeic, investment trust we own and if you need to look deeper into where we are actually investing (right down to stock level), you can find this information direct from the groups we invest with. This is the ultimate transparency.”

Bamford asks: “What transparency is there on total charging?” Moor: “We have committed to providing complete transparency to clients and have always published our total expense ratios prominently (TERs are the best measure of total charging). Our size, influence and structure means we can offer our funds at extremely competitive prices and are comparable with some single-manager funds so it is something we are very happy to be up front about.

“We have actively encouraged the multi-manager industry to come clean on costs as it is key to ensure that customers are receiving good value. Our fund TERs range from 1.8-1.95 per cent, significantly lower than many competitors in this market.”

Fitzgerald: “The TER quoted in the key features includes all costs including the TER of any underlying fund managers we use. However, as with most things in life, you generally get what you pay for. If the TER is capped or very low, the best managers are probably not being selected for the multi-manager portfolio. The best managers demand higher fees and if they deliver performance, we will pay them.”

Potter: “Transparency on charging does need to improve in the multi-manager marketplace. Clearly, investors need to know what they are paying for. Fofs can now outperform but charges should definitely not be out of line. The industry needs to make pricing clearer so that clients know what they are paying for.”

Philbin: “Total charges – TERs are higher for Fofs than Moms as the discounts that Mom funds can get are greater than Fofs but with the advent of institutional share classes and more money being directed toward Fofs, we are finding that we can negotiate very good terms from fund management companies.

“In fact, economies of scale work extremely well in Fof mandates (in fact, better than Mom contracts) as the more money we can place with individual groups, the bigger discounts we can achieve, thus reducing the TER and boosting the returns to unit holders.

There are a number of fund management companies where we have signed confidentiality agreements regarding how much we actually pay in relation to AMCs but to say our TER is around 2.00 per cent actually makes our proposition extremely attractive. Our AMC is 125bp, of which 50bp is paid as renewal, then we have to pay a certain AMC to the underlying fund management companies. When you add in dealing costs and other costs for admin and custody, we feel we have a very attractive package. Most unit trusts actually have a 150bp AMC, so we are at least 25bp cheaper from the start.”

Money Portal managing director Richard Craven asks: “With the flood of Moms and Fofs on the marketplace, how can managers of these products stand out from the crowd and spice up their offerings?” Moor: “Producing spicy portfolios to stand out from the crowd is a potentially dangerous option. Trying to get noticed by generating strong short-term results can often backfire over the longer term. We believe IFAs are looking for providers with proven, robust and long-term investment propositions, not those who are taking unnecessary risk with their client&#39s money. The fact that we are a leading player in this market and have received assets from well over 2,500 IFAs indicates there is significant demand for our type of approach.”

Fitzgerald: “You should look at the experience and track record of the various multi-managers. This will make selection easier as many new entrants do not have a track record or experience in multi-manager. We employ 14 analysts, fund researchers and fund managers and have a history going back to 1995 in multi-manager portfolios. We believe our products stand out, given their bias towards generating absolute returns through astute manager selection rather than just being expensive index trackers.”

Potter: “Performance, performance, performance. Most investment managers&#39 time horizons are generally in the five to 10-year range but inevitably they will focus on each of their interim six-monthly reports. Both Moms and Fofs can demonstrate their ability to better the average on a consistent basis but the reality is that many are just generating marginal performance on the index and frankly this is insufficient if the index is broadly going nowhere.”

Philbin: “The way we manage our Fof offering I do not actually want to deliver a “spiced-up” offering at all.I see Fofs as a core holding and a central hub from which to build a diversified client offering. To me, Fofs are not just a product but a service – one that can assist IFAs in delivering client objectives.

“Our portfolios are designed to deliver consistency across a whole number of time periods, thus making it an easy proposition for IFAs to recommend as their core investment. If we deliver consistency on a consistent basis, then, by default, we will stand out from the crowd. Also, all our funds within the multi-manager range now have investment protection. If the client dies and the investment be worth less than the initial investment, then a life policy written outside of the investment but paid for by Isis will kick in (to the tune of a shortfall maximum of £150,000) thus making the investment very attractive.

“We feel this is excellent within the trustee marketplace but also to give clients peace of mind due to the excessive levels of volatility witnessed over the past four years.”

Craven asks: “In the world of single-fund management there has been some progress in the use of perf-ormance for TERs. Could this translate across to the multi-manager world where charges are traditionally more expensive?” Moor: “We do not view our charges as being expensive, as we outlined earlier, so we do not think it is necessary to counter cost with a performance fee solution. However, we believe that the concept of performance-related fees is one that could be attractive and we are considering them as part of our overall fund proposition.”

Fitzgerald: “Are charges for multi-managers really higher? The alternative is a selection of individual funds generally selected and managed by the IFA. Each time a switch takes place, initial charges will generally be taken. These charges, which multi-managers do not pay, can significantly increase the cost of this DIY approach. Multi-managers will also generally pay less for their underlying managers. We already use performance fees on a number of our funds. However there are certain regulatory restrictions which need to be addressed.”

Potter: “Most definitely. We are all for performance fees on single funds as it is important that the client gets value for money. If performance fees sharpen performance on multi-managers even further than what it is now, then they could be appropriate.”

Philbin: “Economies of scale work very well in managing Fof portfolios. The more assets we can attract, the bigger discounts we can achieve, the lower costs can be passed on, and ultimately TERs fall. The investment industry is constantly changing. Oeics with institutional share classes, for instance, did not exist five years ago.

“The market is moving on, dilution levies (either to purchase or redeem) are in place to protect unitholders and we see this as a good thing. Our traffic light analysis quantitative screening model helps us buy funds and hold them for the longer term. If you have low turnover, you tend to have lower TERs. In fact, the TERs on the Isis multi-manager balanced fund is about 1.9 per cent and the Isis multi-manager growth trust is just over 2 per cent.

“But we cannot let TERs be the driver of the investment decision. For instance, because of changes to the investment marketplace, you will find performance fees becoming a more prevalent part of the community. Many groups will either charge a lower AMC and boost TERs if they perform well or be like Gartmore in its high-alpha (Focus) range of products and have a high AMC and reduce it if they underperform.

“I personally do not mind paying a higher AMC to a fund group if the fund manager is delivering high levels of performance without taking excessive risks.”


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