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| Risk & Reward: Strategy |
An Expert Array
John Ferry
06/01/2005
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When Steve Roberts, a now-retired Seattle business owner, began managing his
company’s employee pension fund in the early 1990s, he quickly realized he
needed outside help. “I looked at traditional pension fund administrators, at
what their returns were and what their program was,” he says. “It became obvious
to me that multimanager was a better way to go.”
 | | (Photograph by Comstock Images.) |
Multimanager investing—also
known as “manager-of-managers”—is a strategy in which a large investment company
manages a portfolio of leading fund managers, much like a traditional manager
might run a portfolio of securities. “Just as you can combine a series of asset
classes, such as stocks and bonds, to control risk, you can strategically
combine a number of investment managers into a portfolio to control risk and
gain diversification,” explains Greg Stark, managing director of U.S. individual
investor services at Tacoma, Wash.-based Russell Investment Group. “The way we
pick those managers, research those managers, combine them, monitor them and
make changes is very similar, from a process perspective, to a traditional money
manager buying stocks. That means we have a team of analysts who rank managers,
just as a traditional stock analyst would rate stocks in a buy, hold or sell
manner.”
Roberts, a multimanager client of the Russell Investment Group,
concluded that hiring professionals to identify the best fund managers seemed
like the optimal choice for achieving a well-balanced portfolio. “They do a much
better job of analyzing why managers are going to be successful in the future,”
he says. “They look at the funds over long periods of time and monitor their
performance relative to their styles, so they keep them on track.”
The
approach sounds very similar to an investment vehicle commonly known as a
“fund-of-funds,” but is in fact a different concept, Stark explains. “The term
fund-of-funds refers to a structure where a fund is buying a series of
underlying funds. When we build a multimanager portfolio, we directly hire the
money managers rather than buy one of their funds.” Just as a pension fund would
hire, for example, Barclays Global Investors and would as a result become one of
that firm’s institutional clients, Russell contracts directly with various money
managers, who then run separate accounts for Russell’s multimanager
fund.
This approach has obvious appeal for the fund managers themselves. “We
recognize that if a manager is really good, then he’s going to want to be
independent because he’ll make more money, so it’s better for us to be an
integrator of experts rather than try to do everything ourselves,” says Kevin
Robins, senior vice president and head of wealth management solutions at Oaks,
Penn.-based SEI Investments, another large multimanager provider.
TOP VIEW
Multimanager investing is a strategy in which an investment company tirelessly
researches the performance of leading fund managers, and then contracts with the
best of them to start and run funds. Somewhat similar to a fund-of-funds
structure, this strategy allows investment companies like Russell, SEI
Investments and Northern Trust to build diverse “manager-of-manager” portfolios
featuring funds created and managed by investment leaders. Investors in
multimanager funds often enjoy less volatility, but it comes at a price: lowered
upside potential. |
According
to a 2004 survey of multimanager services by Cerulli Associates, a financial
consulting company in Boston, the main providers of multimanager investments in
the United States are Russell, SEI Investments and Northern Trust. These firms
report an increasing proportion of their business comes from private, rather
than institutional, investors, reflecting a general trend among wealthy
individuals of adopting more sophisticated financial management techniques. “In
the past, high-net-worth individuals have typically gone to banks and other
money managers to have their wealth managed on a proprietary basis using
in-house capabilities,” says Alan Robertson, managing director of wealth
advisory services at Chicago-based Northern Trust. “But increasingly—and this
has been driven by the performance of the equity markets since 1999/2000—there’s
been a search for diversification of managers. As is so often the case, what
developed as an institutional capability is now being brought to the
high-net-worth market.”
Shock Absorbers
Risk control, say purveyors of multimanager investments,
is the strategy’s biggest selling point. “Risk control comes at every level—with
managers, their styles and with asset classes,” Stark says. “That is what large
investors do, and if we as individuals do that then we will have a much better
investment experience—certainly a much less volatile ride.” He adds that the
multimanager approach should lower the amount of risk that an investor takes in
the short, medium and long term, compared to investing directly in funds.
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