Citius, Altius, Fortius - A Sporting Analogy
With most of us glued to the television watching the Olympics, I thought it was a good time to use a sporting analogy to explore a popular investment approach.
One event that combines all the qualities listed in the Olympic motto Citius, Altius, Fortius (Faster, Higher, Stronger) is the decathlon. Decathletes have to train for and be skilled at 10 different disciplines, quite a Herculean task. To win a gold medal they need to have speed for the sprinting events, stamina for the distance events, strength for the field events like shot put and technique for events like the pole vault.
This is very impressive, but there is a group of athletes who consistently outperform even the best decathletes. The individual event champions deliver far better performances in their area of expertise. At the 2008 Beijing Olympics, decathlon gold medallist Bryan Clay ran the 100m in 10.44 seconds. Usain Bolt took just 9.69 seconds in the individual event. It’s probably unfair to compare anyone to Usain Bolt, but the results of the other nine disciplines tell the same story. For example, Clay threw the javelin 70.97m, while the individual event gold medallist achieved 90.57m. Clay reached a height of 5m in the pole vault compared to the individual champion’s 5.96m. The specialist performed better than the generalist every time.
You would not expect Usain Bolt to also specialise in the pole vault or javelin, specialists tend to be just that - specialists. There are many situations in life where a specialist performs more efficiently and delivers better result than a generalist, and this is particularly true in investments.
Just because an investment manager is skilled at managing UK equities, for example, does not mean he will be as successful at managing US or Japanese equities. Managers also tend to specialise in a certain style of investing, and these styles move in and out of favour according to economic and other factors. They will therefore produce impressive results in certain conditions, but below average ones in others.
Some investors rely on just one or two fund managers to look after their investment capital. However wouldn’t you prefer to have individual specialists managing the various areas of the market your capital is invested in?
You can benefit from a team of specialist investment managers though “multi manager investing”.
Today most investors agree that holding different asset classes and different regions and sectors in their portfolio spreads risk. Multi manager funds add a third, and increasingly important, level of diversification in your portfolio.
If you invest in a multi manager fund, you benefit from a team of specialist managers, as well as diversification across multiple investment styles within each fund, with different managers looking after each style. As an example, let’s look at the US Equity Fund offered by Russell Investments, which is recognised as a specialist in sophisticated multi manager investing. There are nine specialist managers looking after this one fund (as at June 2012), covering four styles: growth, value, market-oriented and beta reduction, and even these are split into sub-sections.
This complementary blending of managers and styles can reduce investment risk, regardless of what style is in favour, and help provide more consistent returns through different market environments.
Just like a strained muscle would hamper the decathlete in all his events, if prevailing market conditions are unfavourable to a single manager’s investment approach, performance may suffer. Multi manager spreads risk as it lowers the investor’s dependence on the success of a single manager’s approach.
Russell Investments carefully selects each manager based on “best in class” criteria. This means that investors can benefit from the expertise of some of the world’s leading managers across their whole equity portfolio.
Russell devotes considerable resources to identifying, hiring and managing some of the best money managers in the world. It has over 200 investment analysts dedicated to finding, assessing and monitoring investment management teams globally. They aim to select managers with an exceptional ability, strong track record, robust processes and complementary skills. In the year to March 2012 it researched over 9,000 investment manager products, selecting 221 of them for specific assignments.
Going back to the sporting analogy, in the world of athletics individual champions can easily change from year to year. The same can happen with investment managers, but the multi manager firm’s research is designed to find the next champions. Each of their funds is also constantly monitored, so that managers can be changed as and when necessary to improve performance for clients.
Multi manager investing is not designed to attempt to win a gold medal in just one particular season. Rather, it aims to produce consistent results, season by season, over a long-term period.
It is a suitable investment approach for various investors with different needs. However you should always discuss your requirements with a professional wealth manager like Blevins Franks, as your investment strategy should be targeted to meet your personal objectives. Blevins Franks combines investment advice with effective tax planning strategies to maximise wealth preservation opportunities.
2nd August 2012