The term multi-manager fund is one that you will often see in investments circles whether you are a private or institutional investor. As with many financial terms it really describes a characteristic of a type of investment vehicle which can in turn incorporate many other features.
A Summary
The term can be applied to specific investments which come under the umbrella of collective investments. In other words, at a high level, they are investments which require people to pool together their money to buy the underlying securities. A multi-manager fund can therefore come in a few guises such as Unit Trusts (funds with fluctuating numbers of units) Investment Trusts (i.e., Investment Companies, with a fixed number of shares on the market) and Open Ended Investment Companies (OEICs, an investment company open to fluctuations in share numbers) amongst others.
To be defined as a multi-manager fund, the investment must essentially involve or incorporate a number of different fund managers in its running. The key driver behind multi-manager funds is the diversification they offer in spreading risk across numerous fund managers who may perform better with particular assets in particular markets.
There are two main ways in which this can be achieved - that is two structures that the funds can utilise - each with their own benefits and drawbacks: A Fund of Funds (FOF) structure or a Manager of Managers (MOM) structure.
Funds of Funds
The principle characteristic of a Fund of Funds is that it is a single fund which then invests in a number of underlying funds rather than directly into securities itself. This means that it is the Fund of Funds manager's responsibility to evaluate and manage which of the underlying funds the FOF will be invested in.
The manager will need to assess the credentials of each underlying fund based upon its past performance, underlying investments, adherence to the aims, asset classes and risk profiles of the FOF and to a large extent the performance of the underlying funds' managers themselves, before constructing the portfolio. Once they have done so the performances of the underlying funds are solely in the hands of the numerous fund managers. If funds don't perform the FOF manager can only decide to switch to other funds.
The FOF can either be constructed to invest in a range of themed funds based upon the risk profiles of each, or be restricted to a single asset class in accordance with the objectives of the fund. What's more, most FOFs will be unfettered, that is, they have the scope to invest in whichever funds that are available on the market that they deem appropriate, but a few fettered funds are limited to those from the same investment company.
FOFs benefit from the potential advantages of all multi manager funds, diversification and the spreading of risk. Furthermore, they can offer a private investor a way of getting their money into non-retail funds - those funds that are reserved for institutions to invest in only - giving them greater choice. Investors are also not liable for paying Capital Gains Tax (CGT) when monies are moved from one underlying fund to another whereas they would if they had invested in those funds directly.
However, this dual layer structure does mean that costs may be incurred at both fund levels and therefore FOFs tend to prove more expensive as running costs accumulate.
Manager of Managers
A Manager of Managers fund does not invest in underlying funds as its method of diversifying across multiple managers, but instead employs the numerous fund managers directly within a single fund, usually each with responsibility to manage investments in a specific asset class with what is termed a segregated mandate.
This approach not only, in principle, spreads the risk as results are not wholly dependent on a single fund manager, but also allows an overall fund manager to bring in specialisation in each sector and therefore, hopefully, greater returns. The funds do still benefit though from unified control as the manager of managers will be aware of all investment activity carried out by the other fund managers. In addition, this awareness applies directly to the assets in which the fund invests because there is no secondary level of funds involved.
MOMs often benefit from lower running costs. The switching of monies from one asset class to another for example (and therefore one fund manager to another), does not incur the costs that would be a factor if the monies were switched from one fund to another under an FOF. However, the funds do still access the discounted investment costs that are available to institutional investors, due to the large scale of their transactions, which can then be passed on to the fund's investor.
There are many differing investment options that lie within the boundaries of the Multi Manager Funds definition and each comes with it its own levels of risk depending on the expertise of the fund managers, the diversification of the underlying investments, the differing themes or asset classes and to some extent the costs involve. Therefore it is always important to make sure you get advice from a qualified professional before deciding to invest in such complex investments.
© Stuart Mitchell 2011
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