What is a multi-managed fund?

When you invest in a unit trust fund, you can choose between a fund in which the asset manager invests directly in securities such as shares and bonds, or a multi-managed fund in which the investment function is outsourced to a number of external asset managers.

The external asset managers in this second type of fund can be likened to a football or rugby team. The coach (multi-manager) formulates a strategy to beat an opposing team. Bearing this strategy in mind, the coach selects players (asset managers) who, besides being specialists in the positions they play – for example striker, wing or full back – complement each other with their respective competencies in a way that promises the best chance of success.

There are two kinds of funds that use multiple managers:

1. Fund of funds: this is a fund that simply invests in an array of other funds that are generally also directly available to you, the investor. But the variety and diversity of managers is then available in a single, more affordable fund. The list of funds will typically appear on the fund’s minimum disclosure document or fact sheet.
   
   
2. Multi-managed fund: the portfolio is divided into components and the manager of the fund is a manager of managers. For example, the portfolio may be allocated according to asset class, with a specialist manager managing the portion allocated to the relevant asset class on behalf of the fund.
   
   

Why blend funds or managers?

The purpose of blending inputs from different managers is twofold.

First, it ensures that each component of the portfolio is managed by an expert in that field. For example, in a portfolio of equities, you might have a mining expert managing the resources shares while an industrial expert specialises in the industrial shares. Or the multi-manager may blend equity managers that specialise in specific strategies or styles, such as value, momentum or quality.

It is difficult for a single manager to be an expert across all investments in an increasingly specialised investment world that includes private equity and hedge funds.

In multi-asset funds which are allocated across asset classes, you might have a handful of managers responsible for local equities, others responsible for bonds and money market instruments, and yet others who specialise in offshore markets.

Second, a blend creates diversification across managers, which can be according to asset class, geography, investment style or a mixture of these. The aim is to create a portfolio with similar returns to a comparable single-manager fund but that has a lower risk profile – in other words, it has lower volatility, is less affected by the fluctuations of investment cycles and delivers a steadier return.

It is important to note that the underlying investments in the blend may not necessarily be actively managed. Funds of funds in particular may include passively managed, index-tracking funds if they offer good value or are more representative of a specific market.

What qualities does a multi-manager need?

A typical portfolio manager needs the skills of an investment analyst who, for example, researches companies thoroughly and studies their financial statements before making investment decisions.

The objective of a multi-manager is to understand the investment philosophies and styles of the chosen managers and how they perform at different stages of the investment cycle. The multi-manager needs to blend specialist expertise and investment styles for the best outcome consistently. This means that, instead of researching companies and studying balance sheets, the multi-manager must research the local (and offshore) investment industry, with a view to selecting the best people in that industry for the intended investment strategy.

Once a multi-managed portfolio has been constructed, each asset manager is continually monitored to ensure that it remains aligned to its investment philosophy and style and its contribution to the portfolio is evaluated.

Do multi-managed funds cost more?

The biggest criticism of multi-managed funds is that outsourcing to different managers introduces an extra layer of investment costs.

When these funds first appeared in South Africa in the 1990s, they did have higher costs than single-manager funds and their performance did not generally compensate for this.

However, as the multi-manager sector has grown and matured, costs have come down and performance has improved. Lower-cost passive funds have driven down costs across the collective investment industry, and multi-manager funds are also able to take advantage of economies of scale and discounts afforded to institutional investors. This means that the price difference has largely evaporated.

A comparison of one large asset manager’s single-manager and multi-manager general equity funds showed that the single-manager fund had a higher total investment cost for retail investors over 12 months (1.83%) than its multi-manager counterpart (1.53%).

Am I safe in a multi-managed fund?

The investor-protection requirements in the Collective Investment Schemes Control Act that apply to single-manager unit trust funds (see How am I protected when I invest in a collective investment scheme?) also apply to funds of funds and multi-manager funds.