TRADITIONALLY, there have been two investment routes open to investors: directly, by buying assets such as shares on the stock exchange; or indirectly, through collective investments, such as unit trust funds, which do the investing for you.
Collective investments are easily accessible, expose you to a wide range of underlying assets, and importantly, put your money in the hands of professional investment managers. This is why they have become so popular the world over: in South Africa alone there are about 1 400 such funds.
In the past decade or so, the multi-managed fund, or fund of funds, has become popular. This is a fund that invests in other funds, which is a further step away from investing directly. The multi-manager’s skill lies in choosing funds that complement each other so as to provide a better outcome for the investor over the long term than any one of its constituent funds would do.
It’s important to remember that investment outcome is not only about return; it is about the degree of risk incurred in achieving that return and the consistency of return over a given period.
RISE IN POPULARITY
Why the rise in popularity of the multi managed fund?
Riccardo Fontanella, head of technical marketing at Alexander Forbes Investments, says it’s difficult for the lay investor to keep pace with the rate of change in the investment industry and the ever-increasing number of funds to choose from.
“There is a growing interest in multi-managed solutions globally. These solutions combine several asset managers, across different markets, asset classes, and investment philosophies, into one portfolio to better manage investment risk and smooth out your returns,” Fontanella says.
He says the growing popularity of multi-managed funds makes sense for several reasons:
1. The choice paradox: too much choice is not always a good thing.
“South Africans, like other investors globally, are simply overwhelmed by investment choices. Too much choice and complexity can compromise decision-making and lead to poor outcomes. Multi-management means delegating decisions to industry experts who are dedicated to making sense of this complex world and exercising good judgements and quick decisions on your behalf,” Fontanella says.
2. A tall order: the heavy burden of day-to-day priorities. “Work, family and everyday responsibilities constantly demand their share of time and energy. This can make staying on top of your savings and investments an extra burden. Multi-managed solutions can help lighten the load.”
3. The governance gap. “A good governance structure for your investments is like a jigsaw puzzle: it consists of several pieces – investment management, operational management, market awareness, regulation and risk control. Having an integrated governance network for your investments can go a long way in bettering your investment outcomes,” Fontanella says.
4. Managing expectations: the real costs of emotional investing. “Poor investment decisions undermine returns. Return on investments is important, but only in the context of keeping investors invested and confidently on track to reach their investment objectives by not letting their emotions win over reason. Multi-managed solutions aim to manage investments in a way that is tied to expectations and comfort levels,” Fontanella says.
FUND CHOICE
Personal Finance asked Lebo Thubisi, head of manager research at Alexander Forbes, how a multi-manager achieves diversification in a multi-managed portfolio.
“Purposeful diversification means spreading risk more effectively, not only across asset managers, but also across asset classes (traditional and alternative) and investment strategies,” he says. His team uses a process encompassing three steps:
1. Asset class allocation: identifying how much to invest in each asset class. “We access and make use of broad investment opportunity sets, spanning traditional (equities, property, bonds and cash) and alternative (hedge funds and private markets) asset classes, locally and globally. Alternative assets help spread investment risk and capture different sources of returns,” Thubisi says.
2. Strategy selection: determining which management styles or factors within each asset class work together optimally in achieving a portfolio’s objectives. “We make intelligent use of a range of investment strategies to achieve complementary exposure to attractive investment styles. The result is less volatile return streams and an improved probability of achieving desired objectives, irrespective of market or economic conditions.”
3. Asset manager selection: researching the asset manager universe to find those best placed to implement the desired strategies.
COSTS
Fontanella says it is a common misconception among investors that multi-managed funds are more expensive than single-manager funds because of extra layers of charges.
“This is a fair concern in the context of multiple asset managers being employed within one portfolio. However, investors in multi-managed portfolios do not pay a cumulative layering of absolute management costs specific to each underlying asset manager in the overall portfolio. Rather, they pay a proportional fee of these management costs relative to each asset manager’s assigned weighting in the portfolio. So, what may be perceived as an increased layering of fees is, in fact, a blended and pragmatic multi-management fee.”
Moreover, Fontanella says, multi-managers are typically able to introduce economies of scale through the aggregation of investors’ assets, investing large amounts relative to retail investors.
“In summary, there is no reason for investors to think that multi-managed portfolios should be significantly more expensive than other market-linked portfolios. In fact, using their scale and relationships within the asset management industry, multi-managed portfolios are uniquely positioned to negotiate down fees and offer competitive management fees, even after considering their own cost for managing the overall portfolio,” Fontanella says.
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PERSONAL FINANCE