Multi-manager role ‘remains valid’

Johannesburg – They may incur multiple levels of investment costs and performance dilution, but multi-managers still have a part to play.

That's according to Trevor Abromowitz, head of asset consulting at Alexander Forbes. Abromowitz told Fin24.com that pension funds, for instance, benefit from the multiple management function.

Abromowitz was responding to critics of multi-managers, who argue that due to the relatively small size of the South African market and the limited number of listed stocks accessible to fund managers, it doesn’t make sense to pay multiple managers to track effectively 40 to 60 stocks.

Typically, a multi-manager or "fund of funds" approach sees multiple managers dividing up investment decisions around asset allocation and where the funds should be invested. Often these managers will then entrust their funds to other managers.

"I believe that the multi-manager model works and the increasing competitiveness in the sector means that there is less [profit] margin for multi-managers," said Abromowitz.

He added that due to their size, pension funds can enjoy "economies of scale" when engaging multi-managers to manage their funds.

His advice is that pension fund trustees should entrust their equity portfolios to four or five managers, with at least three to manage assets allocated to the bond sector.

One area he believes pension fund trustees need to focus on more closely is evaluating underperforming managers, and having clear-cut ways to sever ties where necessary and with the minimum negative effect on the funds.

"It typically takes seven months for a board of trustees to make the decision to terminate an asset manager; for this reason these funds should also have a manager continuation policy in place."

Warren Ingram, who heads up the wealth offering at Galileo Capital, agrees there are times when a multi-manager can add value, particularly at smaller institutional funds.

"For instance, if you had a guy like Tim Allsop from Nedgroup, who is quite an aggressive trader, and then you had a guy like Dave Foord [of Foord Asset Management] who is a deep-value investor, you might have some opportunities for outperformance in a smaller portfolio," Ingram said.

However, he adds that he does not believe most funds need more than three managers to run a portfolio.

He believes investors should pay special attention to the cost of institutional investment. "Just because the costs have come down, does not mean that they have come down to acceptable levels," Ingram said.