PAM Guide to Wealth Management


Multi-managers buy and sell positions in funds and fund managers, determining portfolio weightings on your behalf. They also provide diversification across managers, sectors, markets and asset classes through just one fund.

There are two types of multi-manager funds, manager of managers and fund of funds. Manager of managers and fund of funds take different approaches in how they allocate money.

Fund of funds

Fund of funds invest directly in the retail funds of asset managers and are, in effect, marketing the underlying funds without owning them. Providers of fund of funds argue that this approach allows them ease of access into and out of funds, because as retail collective investments they offer high levels of liquidity.

Manager of managers

In contrast, manager of managers are the owners of the underlying funds and draw up mandates for each asset manager to follow through segregated (i.e. separately managed) accounts. The money is managed according to the specific wishes of the manager of managers, so it can be a more effective and transparent way of diversifying the portfolio. The manager of managers will know the investment approach and holdings of all the underlying managers. They will be the only investors in each of the underlying funds.

It is argued that an advantage of the manager of managers approach is that they can invest in institutional asset managers normally inaccessible to retail investors. To-date, there is no definitive evidence that institutional managers necessarily out-perform their retail counterparts, however.

Some asset managers offer a hybrid of these two types of multi-manager funds. They hold funds and segregated accounts within the same portfolio, often depending on the preference of the underlying manager.

Another distinction is between fettered and unfettered fund of funds. Fettered products only invest in funds run by the asset management group offering the fund of funds. In contrast, unfettered products are not obliged to invest solely in their internal funds, so will often invest in third party funds. Some companies do not allow managers to invest in in-house funds, or impose limits on allocations to in-house funds, such as up to 25 percent of the portfolio. This is intended to minimise the potential for conflicts of interest.

One historical criticism of multi-manager funds has been the accusation ofdouble charging. This means the multi-manager levies a charge in addition to the fee of each of the underlying funds or managers. But, in reality, the cost of many multi-manager funds is comparable to the most expensive single unit trust. Therefore, if you construct a portfolio of unit trusts, this may end up more expensive than a multi-manager fund. This is, however, something to look at carefully if you decide to use a multi-manager, as higher fees eat into your net returns over time.

A major differentiator between multi-managers is the degree to which they actively asset allocate. Some make active asset allocation decisions, believing it can add significant value. Other multi-managers, however, stick closely to a benchmark, arguing they add value through fund selection. Both manager of managers and fund of funds have active and inactive asset allocators within their ranks.

In the future, there is likely to be greater differentiation through the asset classes used by multi-managers. Traditionally, multi-managers have tended to focus on a single asset class, providing non-institutional investors with easier access to alternative investments, such as hedge funds and private equity, as well as equities and bonds. Increasingly, however, as regulations change, some multi-managers may invest in multiple asset classes within the same fund.

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