Multi Manager Investing – When Many Heads Are Better Than One

30.11.10

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There are various ways of buying stocks and shares. It is of course possible to buy and sell individual shares (equities), picking and choosing which company to buy shares in, how many to buy and

There are various ways of buying stocks and shares. It is of course possible to buy and sell individual shares (equities), picking and choosing which company to buy shares in, how many to buy and at which point to sell. This would mean relying on others to give you good advice or spending much time doing research yourself, keeping up to date with market news and trusting yourself to make the right decision at the right time. Either way, this can be considered a risky approach unless you have much experience and skill in this area, and even then trying to time the markets is likely to backfire at some point.

You can also invest in the stockmarket via a fund. In this case you would research the various fund managers available to you, pick the one you trust the most, then leave him or her to do all the work to make your money grow. The fund manager will research companies and shares and make his selection on behalf of the collective investors, depending on the fund objectives.

For most people this is a more sensible way of investing than trading individual shares. However the fund manager?s ability and performance will greatly influence your returns and you also need to consider whether you have adequate diversification. These are two reasons why a third investing option has become more popular ? multi manager funds. Buying multi manager funds has many benefits over buying funds run by just one fund manager.

Relying on one fund manager has various potential pitfalls. For a start you may have picked him or the fund because of its past record, past performance alone is not an indicator of future performance. Perhaps the manager achieved good results because he took a risky approach that worked over that investment period. In this case such an approach is likely to have a completely different outcome in different market conditions. Perhaps the manager favours equities with a certain style, for example growth, and over the past investment period growth stocks performed well – but how would he perform in a climate which favours value? Few managers remain the top performers over a number of years.

It is also possible that after you invest in a fund the fund manager leaves and is replaced by someone who uses different tactics.

Also, fund managers are usually ?generalists?, i.e. they are unlikely to be highly informed on all areas of the market; after all, few people are expert at everything. The decathlete analogy is often used to explain this point. Who isn?t in awe of the decathlete who performs well at 10 different athletic disciplines? However these athletes would not be the best at individual events and in this case a specialist will beat the decathlete. A specialist who is dedicated to just one or two disciplines will run faster, throw further, jump higher etc than a generalist decathlete.

Likewise, wouldn?t you prefer to have individual specialists managing the various areas of the market your money is invested in, rather than one generalist managing all areas? The multi manager approach makes this possible.

Investors in a multi manager fund 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, one of the pioneers in multi manger investing. This fund is diversified across four styles: growth, value, market oriented and ?best? ideas. It has eleven specialist managers looking after this one fund and between them they cover six different styles.

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 all kinds of market environments.

The managers for each fund are carefully selected on ?best in class? criteria, an approach which enable investors to benefit from the expertise of the world?s leading managers across their portfolio and which helps maximise future expected returns. As a multi manager company, Russell devotes considerable resources to identifying, hiring and managing some of the best money managers in the world.

While each fund will be nicely diversified over managers and styles, to reduce risk further the key is to buy various funds ? for example, US equity, US small cap equity, UK equity, Continental Europe equity, emerging markets etc.

This would cover the equity section of your portfolio. For full diversification and to reduce risk further and to suit your circumstances and objectives, you would also include other investment assets in your portfolio, such as bonds, property (real estate investment funds) and cash.

Multi manager funds are suitable for various investors with different needs, including for retired people because of the risk reduction inherent in their make-up and because they aim for steady, consistent returns over the longer-term. However, as always, you should discuss your requirements with a professional wealth manager like Blevins Franks to give you confidence that your investment strategy is specifically targeted to meet your personal objectives.

By Bill Blevins, Managing Director, Blevins Franks

16th November 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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