Investment professionals are often critical of intermediaries believing they add no value to the chain from investor to investment. This view is short sighted.
The investment landscape is full of complex instruments. Investors can choose to make their own investment decisions; however, many have little or no knowledge of where to begin, and an intermediary can be crucial to the success of meeting investment aspirations.
A master of your own occupation
It is always interesting to see an investor who is a master of his own occupation, argue as to why his services should be used, but not share this consistent thinking when it comes to investing. In other words, he feels that he can make investment decisions himself. In behavioural psychology, we call this cognitive dissonance, holding two conflicting ideas at the same time and believing them both to be true.
When I want work done around my house, I call in an electrician, or a plumber, or a tiler. I am none of the above and respect the work done by these professionals. It is easy to make this decision because the quality of the function performed is fairly simple to evaluate. In statistics we would talk about this function having a very strong signal to noise ratio.
In investments, however, the signal to noise ratio is really small, meaning that any signal of skill is completely lost in the noise of the markets, especially over short time frames. In the absence of a clear signal, investors turn to any signal, even if it is completely irrelevant.
Multi-manager as an intermediary
Multi-managers and other intermediaries can play a critical role in the investment value chain. Investors need guidance on how to craft an investment strategy, given their specific preferences and needs. Advisers can assist in understanding and translating these into investment products and services.
I believe an adviser function is correctly focused on the investor, as this is their core skill. They then look to other industry players to assist with the non-client-facing function of surveying the landscape, performing due diligences, and crafting products and services to meet specific requirements.
This is where multi-managers can add tremendous value. For example, we spend in excess of 600 man hours a year engaging with asset managers. We then spend three times that amount analysing and debating these managers and the products and services they offer. Clearly this would be difficult to achieve for a financial adviser who needs to spend time with his customers, understanding their needs and crafting their strategies.
Our investment process
Essentially, investors pay a single layer of fees to multi-managers for five layers of service.
We begin by understanding the investment objectives of the product or service that we are commissioned to create. We work with consultants and financial advisers who know exactly what their customers need.
We then consider the strategic asset allocation needed to achieve these objectives. Most people are aware of the importance of the asset allocation decision, which generally dwarfs most other decisions over long time frames.
We also survey the asset management landscape and research as much of it as possible. This includes due diligence questionnaires, qualitative and quantitative evaluation of manager performance and their philosophy and process, and investment and operational due diligence meetings, including site visits.
The portfolio is managed by portfolio managers and reviewed by a broader investment team, ensuring that all individual components behave as intended, and changed as necessary. An example of this is tactical asset allocation, where we can make minor adjustments to the strategic asset allocation based on various views that we glean from the markets in general and our multiple managers specifically.
We believe that as multi-managers, we are an important component in the value chain of investment professionals that dedicate our time to helping customers build and protect their wealth.
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