Single or multi-manager: which is better?

An age-old debate in the investment and retirement fund industry is whether it is better to put all your eggs in one basket, or spread hard-earned savings between several portfolio managers.

“Supporters of the multi-manager strategy claim that diversification of a portfolio between various managers reduces the risk of not achieving an investment return objective due to poor performance from a single portfolio manager or fund,” says Dr Prieur du Plessis, Plexus group chairman. “Some managers and investment houses consistently produce top-quartile performance, but no one can claim to be constantly on top of the performance rankings. In addition, they assert that as managers take on more risk, the more erratic their performance tends to be.”

Proponents of single-manager funds argue the multi-manager strategy waters down performance, with bad performance cancelling out good performance to such an extent that it will always be average. Also, due to the extra layer of fees, they assert that an investor is likely to end up with below-average performance.

But who is right and who is wrong? To address this question, Plexus Asset Management compared single-manager funds and multi-manager funds within two fund sectors that have a good sampling of both management styles. The selected sectors were domestic general equity funds, which invest in only one asset class, namely equities, and domestic asset allocation prudential variable equity funds, which invest in a combination of different asset classes. The risk-return profile of all the funds in these sectors was plotted over three and five-year periods.

Within the domestic general equity fund sector, findings show the multi-manager funds did not add much value in terms of their risk-return profile, compared with single manager funds. “This is because most of the multi-manager funds have a low standard deviation or risk profile, and they produced below-average performance. Ideally, a fund should offer low risk and high return,” Du Plessis explains.

The results from within the domestic asset allocation prudential variable equity funds sector are very different. “In this sector, most of the multi-manager funds add value through lower risk and above-average performance,” says Du Plessis.

According to Du Plessis, one reason why multi-manager funds do better with balanced portfolios investing in a combination of asset classes is because an investment manager or house often tends to have a greater competence in managing one particular asset class rather than all the different asset classes. “This is the reason for the proliferation of the boutique-style investment house that specialises in a certain asset class rather than professes to be a jack of all trades,” says Du Plessis.

“Another reason why multi-managers fare better with the management of multi-asset class portfolios is because they can play as active a role in the asset allocation decisions as single managers. They thereby add value on two different levels, namely identifying the specialist manager within each asset class and changing the allocation between the asset classes in line with their view on market prospects,” adds Du Plessis.

“While the multi-manager really seems to earn his keep by managing a multi-asset class portfolio, an investor who is investing in a multi-manager fund that focuses on one particular asset class should not write off this strategy,” he says.

“Long-term investors with an aggressive profile, for instance, can consider combining actively managed equity funds that have a consistent track record with passively managed equity funds,” says Du Plessis. “The passively managed equity funds should track both fundamental as well as market capitalisation indices.”

Graphs A

The risk-return profile of domestic general equity funds over three and five years. The multi-manager funds, indicated by the red cloud, did not add much value in terms of their risk-return profile, as most of the funds ended up in the bottom left quadrant of the graph. Although funds in the bottom left quadrant have a low standard deviation or risk profile, they have also produced below-average performance. Ideally, a fund should end up in the top left quadrant, which represents a low risk and high return.

(Click on image to enlarge)

Graphs B

The risk-return profile of domestic asset allocation prudential variable equity funds over three and five years. Most of the multi-manager funds are in the top left quadrant, adding value in terms of lower risk and above-average performance