Monday, May 26, 2008

Introduction to Manager of Manager Funds

I have read and roughly edited information about Manager of Manager Funds from two reputable sites to create my Introduction to Manager of Manger Funds (MoM). This is way better than what wikipedia has.

The main Multi-manager fund categories are Fund of funds (which invests in funds) and Manager of managers (which invests in stocks and shares through appointed investment managers).

I am currently compiling a list of MoM. I am only looking at risk-rated MoM which precludes some such as HSBC's MoM from being included on the list. The list of MoM that are risk rated.

Mostly from TrustNet:

Until recently there were very few opportunities for individual investors to invest in manager of managers in the UK. Today there are a small number of true manager of managers fund offerings available to UK investors, and a larger number of fund of funds offerings.

Traditionally, fund of funds has been aimed at the private investor and the more specialist manager of managers at the institutional market or high net worth investor. Manager of managers funds are becoming more popular, although many still require a large initial investment. In this format, rather than buying funds, manager of managers funds appoint the underlying fund managers directly. This means that the role of the manager of managers is different, since they are responsible not just for identifying competitive managers, but for monitoring the overall portfolios at a stock-by-stock, manager-by-manager level. In addition to the essential selection, monitoring and reporting processes, manager of managers should also have a comprehensive manager-replacement procedure. This ensures that if it becomes necessary to replace an existing investment manager, the change is recognised and performed quickly so as not to greatly affect the fund's performance. The most prominent participants in manager of managers funds are Attica, Russell (via Scottish Widows), SEI and Skandia.

Manager of manager funds owe their heritage to the world of institutional investment. The investment strategies used by manager of manager funds are very similar to those used by the largest investors; pension funds, foundations, charities and the like. Manager of manager funds have typically appealed to these types of investors because of the broad diversification inherent in manager of manager strategies and their emphasis on a clear and consistent investment process.


You have to look inside manager of managers funds to see how they differ from fund of funds products. The reason is that fund of funds invest, as their name suggests, directly into funds managed by other managers. In contrast, manager of manager funds employ the underlying investment managers in what are called 'segregated mandates'.

Segregated mandates are built specifically for the manager of managers fund and hence are tailored to their precise requirements. This helps the manager of managers ensure that the underlying investment managers dove-tail seamlessly into a complete portfolio. The tailored mandates might have pronounced style bias, or a tweaked risk level or perhaps a special sector emphasis, whatever suits the overall portfolio.

The second feature of segregated mandates is that it gives the Multi-manager (via its custodian) direct control over the assets. This can be extremely important if it becomes necessary to change one of the underlying investment managers. Rather than having to sell a fund, and then re-invest the cash (which means that the money is out of the market for a time), responsibility for the basket of securities in a segregated account can simply be assigned to a different manager (possibly with a small transition of securities along the way). Given that some of the securities chosen by the outgoing manager will quite possibly also be part of the portfolio desired by the incoming manager, this is a quicker and more efficient way of making the transition, a difference which should be felt in the performance of the overall fund.

Finally, the use of segregated accounts also means that investment managers who do not run funds registered for sale in the UK can be included in the mix.

Mostly from Blevins Franks:

Around five years ago not many investors in Europe and the UK were familiar with the multi manager investment concept. Today the process is becoming increasingly popular. Investors are spoilt for choice as to which multi manager fund to buy and new funds are launched regularly. It is important for investors to realise, though, that not all funds that fall under the “multi manager” umbrella work in the same way and prudent selection is necessary.

Multi-manager schemes were originally launched in America and Australia, where they have become one of the most dominant means of investing. The Russell Investment Group was one of the first firms to introduce the approach, launching its first multi manager funds for US investors in 1980. It is today the largest multi-manager company operating in the UK, followed by
Northern Trust and SEI.

In spite of the recent increase in popularity in Britain, the UK is still some way behind the US and Australia where financial advisers tend to concentrate on providing tax planning and trust advice. They have learnt that it is best to leave investment advice to the professionals and use the multi manager vehicle to ensure their clients’ capital is looked after by the world’s leading fund managers. There are various reasons why this form of investment has both performed well and grown in popularity over the last few years. Both financial advisers and investors now recognise that diversifying a portfolio across a range of investment managers provides essential risk reduction and more stable returns. It is also important to ensure that you have the right investment structure to start with, one that can easily accommodate necessary changes.

Soon after the turn of the century the consequences of chasing the bull market became only too apparent. Advisers and investors discovered that stock and fund selection is a highly skilled job, one where lack of foresight and poor diversification can be very costly. In contrast, multi manager protects investors from both fear and greed by ensuring their assets are properly balanced and actively managed. The results over the last three years or so demonstrate its effectiveness and success. Keeping pace with the constant change in investment markets takes time and resources, both of which are essential if you want your portfolio to be best positioned
to meet your goals. You need to ensure changes (and changes are always necessary at some point) are implemented without delay to minimise time out of the markets, and that this is done in the most cost efficient manner. Even financial advisers find it difficult to dedicate the resources and time needed. The multi manager process solves all this, but this term covers two very different ways of managing money – “manager of managers” and “funds of funds” and many investors do not understand the difference. In the UK the majority of new product releases have been funds of funds, but this may simply be because they are cheaper and easier to set up.

Under a manager of manager approach, managers are selected and employed specifically to follow precise mandates. Bespoke portfolios can be created to meet specific requirements, right from the outset. Fund of fund managers are restricted to selecting funds registered for sale in the UK. Whilst there is a wide pool of funds to choose from, specialist managers in Europe, the US and other regional markets are ignored. Manager of managers can select from an unrestricted global universe, thus providing a much wider range of investment opportunities.

The ability to closely monitor managers is necessary to ensure that they follow their performance and risk control mandates. Fund of funds managers have to rely on data provided periodically by the fund manager or by agencies such as Lipper. On the other hand managers of managers have actual control of the funds through their agreements and can therefore oversee all the holdings all of the time and keep an eye on every trade made by their managers.

Fund of fund managers have little influence over the funds; they simply buy units in a retail fund. They can react to decisions to change weightings etc, but have no actual control over the managers and their performance. This cannot compare to a manager of managers which has the ability to set the strategy and overall tolerance to risk and can change managers where necessary without having to sell any holdings.

The process for changing managers within a fund of funds typically involves the sale of securities, followed by the purchase of new securities. This results in transaction costs, unnecessary market trading and possibly capital gains tax implications. You will be out of the markets for 24 hours or more, which may have an impact on returns. With a manager of managers approach the providers retains ownership of the underlying securities so your portfolio remains fully invested at all times. There is no risk of missing out on a day’s potential strong performance, and no costs are involved either. As John Kelly of Abbey summarises, “the fund of fund approach… cannot offer the level of sophistication of the manager of managers system. [It] offers what is in fact a stock picking service, not for individual securities but for retail funds. The manager of managers is able to exploit natural advantages in areas of choice, control and the ability to change, in order to build portfolios designed to meet the real objectives of clients, for the time horizon most appropriate to them.”

Scott Donald, director of marketing at Russell explains why, in spite of the advantages of the manager of manager process, there are actually more funds of funds on the market in the UK. It is largely down to resources and costs involved in setting up and maintaining the funds: “Manager of manager funds require a more intricate administrative infrastructure to manage and a larger asset base to implement. To exploit the investment flexibility of the structure fully, the manager of managers needs a comprehensive and detailed global research programme and specialist portfolio management expertise.”

Example of a MoM. Norwich Union balanced MoM Factsheet

Read this doc on Scribd: Norwich Union balanced MoM Factsheet

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