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Tuesday, August 1, 2000
Mixing managers

The past few years have seen an explosion in investment options and unit trust offerings available to South African investors. There has been phenomenal growth in the number, classes and types of unit trust funds and the emergence of a number of new Fund Managers. By 1997, the South African market was offering a wide choice of investment options, but lacked quantitatively driven investment solutions.

m3 Capital  pioneered the introduction of the multi-manager management approach to investment in 1995. In its most simplistic form, multi-manager management simply means ‘managing the managers’ by selecting specialist managers, creating mandates, monitoring and actively managing their performance on a daily basis. Investment performance could now be measured and attributed to skill rather than just luck.
Multi-manager management involves the selection and ongoing management of an array of asset managers (each with a particular skill) from external asset management companies. Each is then mandated to run a specialist fund - these specialist funds are blended together to create a portfolio with a specific risk profile. Investors thus enjoy an investment solution that provides managed exposure to a blend of South Africa’s best asset management intellect.
Says m³ Capital’s Head of Research, David Wakerley, “Investing with more than one fund manager is hardly a new concept for investors looking to maximise returns and minimise risk. Research has shown that no single fund manager is able to provide superior long-term performance across all asset classes or markets, whether locally or internationally. Each fund manager or fund management firm has particular areas of strength that tend to dictate their investment style. Unfortunately, as the macro-economic environment changes, so too does the effectiveness of this investment style, with the natural result being variability in performance.”
“Fund managers who attempt to deliver continuous performance by shifting styles and moving into a different segment of the market, invariably end up ‘chasing’ the market. Understandably, these managers will always be one step behind the manager whose natural style already has him positioned in that segment of the market. Moreover, clients who demand that their manager perform continuously at the top are merely perpetuating the problem. It is no wonder then that most investors believe they need to invest through more than one manager or investment fund to protect against performance volatility. Investors have long been frustrated in their attempts to find sustainable long-term performance. At best, fund managers, both internationally and in South Africa, appear to deliver seemingly random performance. Those that are at the top of the league tables for one period, often find themselves at the bottom for another. Over time, managers tend to deliver little more than market returns minus transaction costs and management fees.”
Multi-manager management goes significantly beyond the simplistic solution of using more than one fund manager to diversify performance risk. Multi-manager management should not be confused with “funds of funds” or “wrap funds”. Whilst both of these multiple fund manager strategies employ unit trusts to represent the underlying portfolios, there are qualitative and quantitative differences between this approach and multi-manager management method.
In the first instance, multi-manager management does not generally use retail unit trusts (which are available to the general public) to capture specialist manager skills. The approach recognises that any combination of multiple managers that is not carefully and quantitatively controlled will merely compound the underperformance problem. For example, many investors who invest through more than one manager or fund simply select from the top performers, not realising that those top performers are almost certainly using similar investment styles. Investment style can account for 90% of a manager’s performance. As a result, performance risk is compounded, not diversified. Blending a range of “generalist” managers who all have the same investment mandate to perform well at all times, invariably results in over-diversification and a perpetuation of random performance. Selecting a blend of managers that does reflect different investment styles without assessing the impact of the aggregation of these different styles, can also lead to an unplanned concentration of bets or merely a re-creation of the index.
“Research has shown that from a selection of top quartile generalist managers, more than 87% will drift to lower quartiles over the next three years. This is primarily a function of the fact that managers’ embedded styles tend to work well during certain phases of the economic cycle but not during all phases. Ask a manager to deliver top performance at all times and invariably, by forcing the manager to move outside their ‘natural habitat’, the manager ends up merely chasing the market for returns. Select a top quartile manager within a specific style specialisation though, and research tells us that 65% of this group should be able to maintain their performance lead against their peers,” says Mr Wakerley.

Copyright © Insurance Times and Investments® Vol:13.7 1st August, 2000
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