Multi-manager funds provide the perfect recipe for higher returns and greater diversification, but is it a case of too many cooks? Nick Sudbury reports.
Russell Multi-Asset Growth Fund
Russell Investments specialises in multi-manager funds and has a global team to identify the best asset managers from around the world. Their aim is to select the leading performers and then combine them into an appropriate asset allocation, which is managed on a dynamic basis to take advantage of market opportunities.
The Russell Multi-Asset Growth fund is designed to achieve long-term capital growth and targets a return of CPI inflation plus 4.5%. By diversifying across different asset classes and managers it hopes to accomplish this with one-third less volatility than equity markets. Since it was launched in October 2012 it is up 10.3%, which is comfortably ahead of its benchmark return of 7.28%.
It is a tiny fund with just £3.3m in assets under management, yet despite this it is invested across 55 external managers. This sounds like overkill, but their argument is that in a low return, high volatility market they want to diversify across as many different dimensions as possible including: asset class, manager, market and style. They hope that the result will be higher growth at a lower level of risk; a process described as an aggregation of marginal gains.
At the top level the fund is allocated between equities, fixed income, real assets and alpha or thematic investments. The first of these categories is then sub-divided between all the main regional markets and spread across a large number of managers, many of whom would otherwise be inaccessible to private investors.
There is a much shorter list of fixed income managers, while the real assets are allocated between commodities, gold, real-estate and infrastructure. The overriding objective in all this is to invest in the right managers in the right funds at the right time. If they succeed it will enable it them to make long-term strategic gains as well as shorter term tactical profits.
One of the main advantages of using a multi-manager specialist is that they are geared up to operate this type of product. Each external manager is carefully selected and given a segregated mandate so there is no duplication of fees. The risk management is automatically built-in as there are real-time systems that provide an unparalleled level of transparency with Russell able to review and control the underlying investment process.
Name: Russell Multi-Asset Growth fund
Sector: IMA Mixed Investment 40-85% Shares
Fund size: £3.3m
Launch Date: October 2012
Ongoing Charges: 2.09%
Manager: Russell Investments
Cazenove Multi-Manager Diversity Tactical Fund
If you are looking for a more concentrated exposure you might be interested in the Cazenove Multi-Manager Diversity Tactical fund. This operates in the IMA Flexible Investment sector, where there is a lot more discretion over the asset allocation and it can be tailored it to suit the prevailing market conditions.
The fund aims to provide capital growth by investing in a range of different asset classes and has built up a strong track record with a 5-year return of 78.2%. It does this mainly by buying other authorised collectives such as unit trusts, OEICs and ETFs.
Cazenove was acquired by Schroders in July, but the purchase has not affected the mandate or the managers, who have both been running the fund since October 2007. Its benchmark is 50% UK equities, 30% international equities, 5% UK government bonds, 10% hedge funds and 5% property, although this is only a guide as it is a tactical remit.
The managers adjust their asset allocation wherever they can increase returns and reduce the downside risk. This is most evident on the fixed income weighting, which has almost been reduced to zero, while cash and money market funds have been increased to nearly 39%. The reason for this unusual decision is that they believe bonds are over valued and by switching into cash they can reduce the volatility from their cyclically-skewed equity book.
Half the fund is invested in shares, but the underlying allocation differs substantially from the FTSE World ex UK benchmark. For example, there is very little exposure to the US because they think that the valuations already reflect the improvement in the economy. Elsewhere they see value in Europe and Japan, as well as commodity related areas in Asia.
The £73.5m portfolio is invested in 17 carefully selected funds. Its major equity holdings include: GLG Japan Core Alpha, Invesco European, Artemis European Growth, Legg Mason Opportunity and BlackRock Asian Dragon, while the UK exposure comprises Majedie UK Focus and Ardevora UK Income.
A concentrated tactical asset allocation fund allows the managers to add value both by their fund selection skills and the timing of their decisions. If they get it wrong it will detract from the returns, but over the last 3 years they have been a top quartile performer, which suggests that they have the skills to pull it off.
Name: Cazenove Multi-Manager Diversity Tactical Fund
Type: Unit Trust
Sector: IMA Flexible Investment
Fund size: £73.5m
Launch Date: May 2002
Manager: Cazenove Capital Management
Pick ‘n’ Mix
Henderson Multi-Manager Diversified
If you are wary about the short-term outlook you might be interested in the Henderson Multi-Manager Diversified fund, which operates in the IMA Mixed Investment 0-35% Shares sector. It has the unusual objective of targeting a long-term total return, while maintaining a low exposure to equities, which has compelled the managers to come up with an intelligent and highly unusual portfolio.
The equity weighting is currently 32.2%, which is just below the 35% cap dictated by the requirements of the sector. Of this the main component is the specialist category that contains a couple of well managed investment trusts − Monks and RIT Capital Partners − as well as some highly unusual and uncorrelated vehicles like Juridica and the Terra Catalyst Fund. A further 9.9% is invested in UK equity funds, with a small allocation to the US, Europe and Japan.
UK and International Fixed Income each comprise between 20% and 25% of the portfolio with the money divided between 19 separate holdings. It is an eclectic mix with exposure to inflation-protected securities, floating rate funds and convertibles as well as more orthodox strategic bond funds. Apart from the 6.4% cash weighting, the remainder of the portfolio is in ‘other assets’. This covers anything from catastrophe reinsurance, private equity and wind farms to healthcare properties.
The Henderson multi-manager team is made up of 12 experienced professionals each with complementary skills in areas such as asset allocation, fund research and selection. They use an active approach to take advantage of short-term tactical opportunities, while diversifying the portfolios to capture as many independent sources of return as possible. Because of their scale they are able to negotiate discounts on the fees, which helps to keep the ongoing charges figure to a competitive 1.59%.
The fund was taken over by the team on 1st March as prior to that it had been the Henderson Diversified Absolute Return Fund. Its performance has been steady rather than spectacular with fairly limited downside risk, which is what you would expect. Although there is a 2.5% yield the income units are only available to institutional investors.
Name: Henderson Multi-Manager Diversified
Type: Unit Trust
Sector: IMA Mixed Investment 0-35% Shares
Fund size: £48.1m
Launch Date: May 1991
Ongoing Charges: 1.59%
Manager: Henderson Global Investors
The PFS Hawksmoor Vanbrugh Fund
The Vanbrugh fund from Hawksmoor is designed to deliver long-term capital growth together with a modest level of income. It is intended to provide a core portfolio holding for investors who want an actively managed exposure to the markets and it has certainly delivered. Since the launch in February 2009 it has returned almost 90%, which puts it near the top of its peer group.
Vanbrugh provides exposure to a dynamically managed portfolio of open and closed ended funds. It is a member of the IMA Mixed Investment 20-60% Shares sector and at all times will have a minimum of 30% in fixed interest and cash, albeit with at least half of its assets in UK and European shares. The underlying philosophy is that the combination of active management and rigorous fund selection can produce above-average performance without taking on unnecessary risk.
One of their strategies is to take advantage of inefficiencies in the pricing of closed ended funds. A recent example was the purchase of the Herald and Caledonia investment trusts when they were trading at attractive discounts to their net asset values. In many cases the managers are able to sell these positions once the discounts have narrowed.
There are currently 41 separate holdings with around two thirds of the portfolio invested in open ended funds. The overall equity exposure is 53%, with fixed interest and cash making up a further 38% and the balance divided between property and physical commodities.
It is an intelligently managed fund and has recently been re-balanced to take advantage of the changes they expect to see in the markets in the coming months. This has entailed trimming back areas with high short-term downside risk such as emerging market debt and adding to favoured long-term opportunities like the Frontier Markets.
Vanbrugh’s top 10 holdings are a mixture of well regarded mainstream funds and more unusual vehicles that provide exposure to attractive asset classes. The former includes the likes of M&G UK Inflation Linked Corporate Bond, Jupiter Strategic Bond and Fundsmith Equity, while the latter contains the hedge fund BH Global and the private equity holding Graphite Enterprise Trust. Together they make a versatile portfolio that is well equipped to navigate its way through the difficult challenges that lie ahead.
Name: The PFS Hawksmoor Vanbrugh Fund
Sector: IMA Mixed Investment 20-60% Shares
Fund size: £37.4m
Launch Date: February 2009
Ongoing Charges: 2.45%
Manager: Hawksmoor Investment Management