27 November 2019
The fact that most active fund managers fail to achieve their requisite performance benchmarks adds hugely to the complexity of the task faced by retirement fund trustees and other investors in determining where to invest members’ money to enhance returns.
Benedict Mongalo, Chief Investment Officer at Novare Investments, argues that multi-manager funds that optimise returns through pooled expertise and effective diversification can help.
“Considering poor manager performance, and the costs incurred by investors when using active fund managers, it is not surprising that the investment management industry is grappling with the question of which strategy is better, active or passive,” said Mongalo.
Poor performance by active managers is arguably also the reason why relatively cost-effective passive products like exchange traded funds (ETF’s) have gained prominence, enjoying increased inflows in the recent past.
Just how difficult the process of choosing fund managers is, is illustrated by Standard & Poor’s S&P Indices Versus Active (SPIVA) scorecard which indicates that over 62% of South African active equity funds failed to outperform the market over a one-year period ending 30 June 2019. That figure rises to 74% when observed over a five-year period.
According to Mongalo: “There’s a view that low returns and the complexity of financial products could be among the factors contributing to the decline in South Africa’s gross savings rate. We hold the view that to optimise returns, investors should consider multi-manager funds.”
A multi-manager fund is a single fund made up of multiple underlying fund managers. These vehicles – sometimes referred to as funds of funds – are structured as a single portfolio, making it easy to invest in one fund while obtaining exposure to multiple underlying managers.
The administrative burden of submitting multiple application forms and know your customer (KYC) documents to managers is eliminated, as is researching each manager to establish their suitability.
Multi-manager funds employ suitably qualified teams to conduct in-depth and rigorous due diligence investigation on fund managers.
Novare’s research structure incorporates traditional and alternative asset classes into a unique range of products, combining the best investment ideas from the most experienced fund managers. This method of diversifying across asset classes and fund managers lowers risk and smooths returns through volatile markets.
The group manages various multi-manager solutions including domestic long-only funds, domestic funds of hedge funds, and offshore funds of funds.
Diversification is a key benefit to investing in multi-managed products that provide access to multiple professional money managers who typically hold different views about markets and prospects for different asset classes. The multi-manager proposition provides access to pooled expertise and the diverse views of investment managers in a single fund.
Said Mongalo: “The idea is that while some managers may underperform given their investment style or economic circumstances, others in the portfolio will outperform thus providing downside protection. The key consideration in the multi-manager fund’s portfolio construction process is to ensure that the performance of managers is not correlated.”
Because multi-manager funds pool assets, they enjoy a degree of bargaining power to negotiate lower fees with underlying managers, benefiting the investor. Multi-manager funds also give access to funds that relatively smaller investors would not have otherwise be able to invest in. Some funds, specifically offshore funds, have minimum investment threshold amounts which are high for an individual investor.
“Multi-managers also add value through regular post-investment monitoring of manager performance. In instances where a manager is underperforming or deviating from the strategy, changes are made to ensure the fund always maintains an optimal position,” said Mongalo.