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Will multi-manager’s popularity be its downfall?

A small number of multi-manager funds continue to dominate the market but most advisers appear sanguine about the concentration of investors’ money.

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With thousands of funds available for advisers to choose from, the task facing financial advisers is daunting to say the least.

And with new Investment Management Association sectors opening up and funds launching, merging or closing, as well as frequent manager movement, there is a staggering amount of information to keep up to date with when making fund selections and constructing a portfolio.

It is no surprise then that multi-managers have received such a boost in popularity in recent years. Outsourcing investment to a successful, consistent multi-manager who can sift through the market allows financial advisers to focus on their core competencies of financial planning.

In July 2013, an Investec Wealth & Investment survey found that 70 per cent of IFAs were outsourcing some of their clients’ portfolios to a third party – a 10 per cent rise from the year before – while 52 per cent admit they were planning on increasing the number of clients’ portfolios they outsource by the end of the year.

But, as with anything in investment, could this popularity of multi-managers become its own worst enemy? Bestinvest managing director of business development and communications Jason Hollands supports the use of multi-managers but raises concerns of possible concentration risk in the future.

Hollands says: “It can make perfect sense from a business point of view. The slight worry I have is that over time people the people who control access to the market are becoming a narrower and narrower group of people.

“If lots of people are using the same multi-managers then what might that do for innovation in the industry?”

Data from FE Analytics suggests relatively few funds-of-funds are winning the bulk of clients’ assets.

The five largest FoFs in each of the 159-strong IMA mixed investment 20-60% shares, the 149-strong mixed investment 40-85% shares and the 133-strong flexible sectors each run more than a quarter of their peer group’s assets under management. The five biggest funds in the 40-strong mixed investment 0-35% Shares run 17 per cent of assets.

Charles Stanley Direct head of investment research Ben Yearsley is less concerned and sees this trend as an organic evolution of the industry and how money moves.

Yearsley says: “It is the way of the fund world. There is a case of money following money to some extent but I do not have an issue with it. The big multi-managers are big for a reason – they are very good at what they do.”

Some of the largest FoFs in the UK include John Chatfield-Roberts, Algy Smith-Maxwell and Peter Lawery’s Jupiter Merlin range, which is home to the £4.8bn Jupiter Merlin Income fund, Marcus Brookes and Robin McDonald’s £1.2bn Cazenove Multi Manager Diversity and Martin Gray and James Sullivan’s £868.6m CF Miton Special Situations Portfolio.

All of these have well established teams that have earned the respect of advisers through decent long-term performance.

Hargreaves Lansdown senior investment manager Adrian Lowcock sees implications for the spread of risk among portfolios.

Lowcock says: “The advisory market need to be cautious about putting all clients into concentrated range of funds because they need variation of funds to pick from.

“You might have a concentration of risk and therefore if everyone is in same risk strategy then risk becomes more pronounced.”

In contrast, Equilibrium Asset Management investment manager Mike Deverell sees benefits from the large size of these multi-manager funds but identifies tactics that would need to be adopted.

“With larger funds, there is less of a restriction in terms of liquidity. But you also have to be careful about how much you put in,” Deverell says.

“And if you were investing in a few multi-manager funds you would want to check all the underlying holdings so you know what you are investing in.”

Chelsea Financial Services managing director Darius McDermott cannot see near-term issues for multi-managers, recognising the growth in flows they have received – partly spurred on by the RDR shaking up the advisory market at the beginning of the year.

McDermott says: “I think it is some way down the road. When they hit capacity then they should look to slow funds and make themselves less attractive. As long as they can continue to add value then I do not think there is a problem.”

However, McDermott can see the trend of outsourcing continuing among advisers. “I think outsourcing to multi-managers and discretionary fund managers will continue and as a result we are already seeing ‘super franchises’ develop,” he says. “There are some massive franchises out there, driven by concentration effect. That is a greater trend.”

Lowcock suggests that investors looking for multi-manage exposure outside of the larger funds consider the like of Rathbones, where David Coombs has built up a healthy track record in his three multi-asset funds.

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