Kagiso Mathole, Hedge Funds of Funds Portfolio Manager at Novare Investment Solutions
BENEFITS OF MM
Why the multi-management model works
Even at the best of times, markets can be unpredictable. Sudden shifts and impact events aside, the entire market cycle in itself passes through different phases that make it virtually impossible for any single fund to unfailingly outperform in any single class or sector. No matter the individual manager style.
This is why a multi-manager or a fund of funds approach, continues to be one of the most consistently successful ways to adjust risk and deliver better return on investment.
Purpose
In layman’s terms, these are funds that specifically invest in other funds rather than individual stocks and bonds. This essentially allows each fund to assemble a team of highly specialised experts to develop a portfolio of investments across the spectrum of funds in the marketplace. Therefore, the multi-manager model works by combining multiple performing funds into a single, secure offering.
The Benefit of Diversification
Multi-management funds enable any investor to obtain instant diversification across multiple variables: market sectors, asset classes, geographies, and even management styles. This minimises the dependency on any given variable to deliver returns, mitigating risk by compounding the overall performance of the combined portfolio. Investors can look forward to protection from severe downturns while maintaining a stable rate of return.
It is particularly attractive to the investor who has just enough to invest, but falls short of being able to develop a fully diversified portfolio across individual funds directly.
The Benefit of Specialisation
Multi-management funds pool the expertise of multiple investment experts, with each fund manager devoted specifically to their unique area of expertise while maintaining awareness of their individual contribution to the overall fund structure. This encourages each team member within the fund to operate optimally in their speciality while simultaneously seeking out ways to complement one another in a holistic approach to delivering the best results.
It’s also worth noting that the individual funds themselves, being specialists in their own right, have already conducted their own rigorous processes in researching, selecting, and assembling their own assets and management style. All of which they actively continue to optimise independently of the multi-management fund.
The result is multiple layers of active management, endlessly engaged in producing better returns.
The Benefit of Active Management
Multi-management funds reduce the onus on the investor of having to find, research, and invest in individual funds. It’s more than just that, though, it’s common sense. There is quite simply, no way that any single investor can ever stack up to the sum total of expertise and real-world know-how of an entire team. Nor can they ever respond as quickly or effectively to sudden market shifts or events as dedicated specialists can.
Overall, it just places less demand, less stress on the investor, whether they are new to hedge funds or seasoned veterans. It’s an effortless way to achieve that crucial balance of appropriate risk and return.
Cost Implications
Multi-management fund fees, on average, are nominally higher than those of single manager funds due to the multiple layers of cost attached to multiple layers of management. However, the decision to invest in a multi-management fund is a value-for-money proposition. Sure, it may cost a little more, but there is a lot more to be gained in terms of peace-of-mind and predictable returns over the long-term.
One should also consider that multi-manager funds have substantial buying power, which allows them to negotiate on fees and access institutional share classes that would otherwise remain unavailable to smaller investors. This saving is also passed onto the end client, making the cost of ownership much less demanding.
Summary
Choosing a multi-management portfolio comes down to your personal appetite for risk. While the function of funds of funds is to reduce risk, there nevertheless remain varying levels of risk attached to various portfolios, depending on how they are constituted and managed.
What you should be looking for is the right mix of these four key benefits that best suits you:
• Consistent Returns: How well has the fund performed? How predictable is that return? Can the return be associated with a definitive and clear philosophy and process?
• Risk vs Return: What diversification and active portfolio management is in place? How has the fund responded to both adverse systemic and non-systemic events?
• Access to Opportunities: What products does the fund invest in which would otherwise be unavailable to you?
• Fee Structure: Does the fund, for example, utilise lower-fee institutional share classes to reduce your costs?
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