Multi-manager funds - a new reality
In the old days, multi-manager funds were a simple proposition. The fund manager would choose a risk appropriate asset allocation and utilise the specialised skills of a range of leading fund managers to deliver stable returns with lower volatility.
But like most things, it's not as simple as it used to be. With the industry upheaval following the GFC, increasing fee pressures and new legislation, multi-manager funds have evolved for a new reality and advisers are taking a fresh look.
Geoff Kellett, Head of Sales at IOOF, says multi-manager funds are finding new ways to add alpha, while staying true to their traditional principles.
"For fund managers now there is a greater focus on new investment strategies and absolute returns that meet the clients' objectives," Mr Kellett says.
The new regulatory and legislative landscape in Australia in recent years has seen a shift in asset flows to low-cost diversified exposures. Fund managers have responded by diversifying their existing products and strategies to look for news ways to increase performance. Some of these new strategies include:
- Inclusion of defensive equities as the low interest environment drives a search for yield.
- Boutique portfolios.
- Inclusion of alternatives as a part of a multi-manager fund.
"Multi-managers have diversified their capabilities across a range of asset classes, looking for new opportunities," Mr Kellett said.
"It is the flow of funds into the multi-asset funds over the last couple of years that reinforces the view that the new investment strategies of the multi-fund appeal to both clients and advisers," he added.
Stanley Yeo, Portfolio Manager Strategy and International Equities at IOOF, also nominates the increased complexity and cost of regulatory compliance as the incentive for advisers to revisit multi-manager funds.
"One of the benefits of multi manager funds is that they focus on reducing investment risk. For advisers, with the increased complexity and regulatory risk, it is becoming harder to focus on the investment side of things."
"A multi-manager fund can also invest more efficiently than an individual adviser can. Multi-manager funds can invest in a broader range of asset classes and gain exposure through derivatives, with the intention of reducing investment risk," Stan added.
With the growth in number and complexity of funds, multi-manager funds also appeal for their capacity for due diligence and continual monitoring mitigate manager selection risk.
With industry-wide pressure on fees and the emergence of legislation such as MySuper, investment strategies are also focused on doing things cheaper.
"You need to look for a smarter way to invest through smart beta, using something like risk factors or fundamental indexing. The pressure on fees means you need to come up with cheaper ways to do things," Mr Yeo said.
Meanwhile smart beta strategies (a lower cost, rules-based method of indexing, however one that is not tied to market capitalisation) are starting to spread from equities to fixed interest and property. Other cost benefits of multi-manager funds include access to funds at wholesale, making sure funds are not out of the market and no CGT trigger when moving funds.
Back to basics
Increasing pressures on the traditional financial planner business model, including FoFA changes and the need to demonstrate genuine value, has also sparked renewed interest in multi-manager funds.
Offering time-saving for advisers who don't rely on active investment skills as the core of their value proposition, multi-manager funds allow advisers to focus on the wealth-planning area of their business and strengthening their relationship with clients. The ability to focus on clients' needs and re-engage with advice is a major advantage of multi-manager funds according to Dean Lombardo, director at business consultancy 'effortless engagement'. Click here to view a short video where Dean discusses the use of multi-manager funds to increase the service experience for clients.
In research undertaken by IOOF in July 2014, clients were asked to consider their investment experience in the previous 12-24 months and rate their level of satisfaction with their financial planner. The results showed a high level of satisfaction, however interestingly, there was effectively no difference between multi-manager funds, model portfolios or direct investments – indicating clients value the quality of the advice they receive, the ability to achieve their lifestyle goals and objectives without requiring their advisers to be focused on investment implementation.
With a focus on cost, new opportunities for investments and objective-based outcomes multi-manager funds have continued to transform to meet the requirements of both clients and advisers and will do so in the future.