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Multi-manager investments – identifying the best of the
best
A new concept in investment
management will be launched shortly in Malta, The Malta Business
Weekly has learnt. This concept is developing at a fast pace
and it is to be expected that investment products of this type
will be well received by the investing public.
In essence, multi-manager investments basically ensure that
the best of the best have been identified. The phenomenal growth
in investment vehicles coupled with the emergence of investment
managers to cater for almost every conceivable investment need,
has left the investor with the complex task of trying to allocate
money across an almost infinite choice. Today, thousands of
funds are available to investors, making fund investment decisions
as difficult as those of direct investment into securities.
The problem for investors and those advising on investment is
the matter of choice:
How do I identify those managers which are most likely to outperform?
How do I combine these managers in a coherent overall investment
strategy?
How do I monitor my investments in terms of performance and
risk?
Professional and private investors are not only faced with the
problem of where to invest and with whom to invest but are also
encumbered with the overwhelming task of monitoring and measuring
investment performance. Few investors have the time or resources
to keep track of developments in financial markets and the administration
of even a small portfolio can be overwhelming.
This rationale for diversifying across managers has led to a
demand for the development of a thorough approach and a true
sense of business in setting up a professional multi-manager
environment. Thus the multi-manager approach offers a viable
solution to the risk of the market underperformance based on
the following:
No single fund house can claim to possess expertise across all
regions and asset classes worldwide
Specialist managers concentrate on one area of expertise and
so they tend to introduce an unwanted style bias into investor
portfolios. By neutralising this style bias through manager
diversification, multi-manager strategies reduce the volatility
associated with single manager strategies.
Few investment managers allocating assets to a single investment
strategy have consistently maintained the same performance ranking
relative to their peers, over extended periods of time. Active
multi-manager investing offers the opportunity of identifying
early signals of expected manager underperformance.
The whole process of manager selection is based on the fact
that superior managers can be identified, and should therefore
exhibit superior stock-selection capabilities within the context
of the prevailing economic conditions.
The process of identifying the best through manager research
is more of an art than it is a science. The manager selection
needs to be carried out on the basis of both qualitative and
quantitative assessment.
Quantitative analysis has an important role in the area of manager
assessment, however if it is utilised alone it provides a dangerous
foundation for predicting future outperformance. Nevertheless
it can be useful coarse screening mechanism in weeding out persistent
losers. The issues which may be assessed in quantitative analysis
could be:
• Consistency of performance over time
• Risk-adjusted return
• Trend in performance
• Attribution analysis: where has performance come from
Qualitative analysis refers not only to assessment of the manager,
but also more generally to his/her investment environment –
meetings with the people responsible for making the investment
decisions is normally an essential ingredient. The key areas
involved in the assessment are:
• Management
• Staff stability and incentivisation
• Resources, assets under management
• Investment philosophy and process
• Risk control
• Administration and service
It is also important that the fund manager must be able to demonstrate
a degree of flexibility and pragmatism. A good active manager,
for example, might choose to increase the risk level of a fund
during a favourable economic period, and lower it during a more
negative
climate.
When constructing a “fund of funds” the provider is
normally able to negotiate preferential terms with the underlying
fund managers so that in the large majority of cases the initial
fee is reduced from the average of five per cent to zero. In
addition the annual management fees charged by the underlying
funds are also rebated.
The multi-manager concept is developing at a fast pace and it
is to be expected that investment products of this type will
also be available shortly in the Maltese market.
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