Blending managers optimally through multi-management

David Crosoer, Executive of Research and Investments, PPS Investments.

Palaeontologists recently announced the potential discovery of a new hominin species – Homo Naledi – deep underground in a cave near Johannesburg.

This species has yet to be dated, but had attributes (such as its feet) that placed it both closer to modern day humans than Australopithecus afarensis (our most-likely-until-now original ancestor), but also aspects that look more primitive (such as its particularly small brain). This discovery has put modern palaeontology in a spin and potentially contradicts how we think about the human family tree.

What parallels, if any, does this have for modern asset management? Well, we have traditionally thought of asset managers as being competent in specific asset classes (i.e. fixed income or equities) and within asset classes in particular styles (i.e. fundamental or quantitative within fixed income, value or growth within equities) and within styles particular regions (i.e. South Africa or emerging markets or global); but more recently asset managers have been ‘discovered’ who appear to straddle asset classes, investment styles and even regions. These modern-day Homo Naledis are especially prevalent in the South African region (going under the pervasive multi-asset class moniker) and have accounted for most retail investment flows over the past decade.

In contrast, managers that have stuck to a distinct speciality (say fixed income) or style (say deep value equities) have found it increasingly challenging to survive. This has been both because the current environment has been detrimental to certain styles (most notably fixed income and value in a world of record-low interest rates and anaemic economic growth) and possibly because investors have favoured the ready-made meal nature of multi-asset class mandates than the more time consuming approach of combining ingredients by using more specialised managers.

As multi-managers, we are not predisposed to any particular manager or style or region. In fact, the greater the choice, the more reassured we are. This is because there is not necessarily a single asset management strategy that will always outperform, or even multiple investment strategies that will always survive.

If anything, Homo Naledi reminds us that there might have been multiple evolutionary paths up until this point, some of which may have succeeded were it not for matters of chance, and none of which that are here today will necessarily remain in the future.

What relevance does this have for investing? We are all, to greater or lesser degree, guilty of assuming that just because something is as it is today, it will inevitably remain the same for the future. But the proto-human genome that backed Homo Naledi 3 million years ago isn’t here today in the evolutionary tree.

The concern with any one strategy – whether it is backing a particular asset class, a particular style, a particular region or even eating the same meal every day – is that no matter how dominant that style might appear today it is far from certain that strategy will be successfully in the future. In fact, the more successful a particular style becomes, the more vulnerable it often is to a particular mutation that throws everything back up in the air.

As multi-managers we do not know before-hand which investment managers will succeed and which will not. But we do know the importance of diversifying manager style so that we don’t put all our ‘eggs’ into an evolutionary blind alley, by backing more than one path if at all possible.

This is more difficult to achieve than one might think. Strategies that look obvious today might become obsolete tomorrow. And strategies that today look unlikely to succeed, could in the fullness of time be crucial for the success of the portfolio. So while multi-managers try to be broadly agnostic about different managers and styles, we do want there to be differences in approach between managers and styles so we can construct portfolios that are not dependent on any particularly view.

All our multi-manager portfolios will not only include manager strategies that make sense, but also manager strategies that are different from each other, that try to do different things, that have both specialised or generalist competencies.

Saving for one’s retirement or any other important financial goal can be an arduous endeavour that requires discipline and commitment. Diversifying appropriately and backing more than one path mitigates the risk of ending up stuck in the evolutionary blind alley.

Multi-manager portfolios are deliberately diversified across strategies to minimise this risk - speak to your financial advisor to find out which one is suitable for you.