The art of multi-managed investing

Riccardo Fontanella, head of technical marketing at Alexander Forbes Investments

THE APPEAL OF MULTI-MANAGEMENT

Multi-management has been around for over two decades. This investment management approach is popular among many investors because it promises to deliver smoother, more consistent investment returns, despite cyclical turbulence of financial markets.

Given last year’s drastic swings in financial markets and continued uncertainty on how the Covid pandemic will have a prolonged impact on global economies and markets, multi-management is again piquing the interest of investors.

This is not surprising. This investment approach offers investors several attractive benefits over other investment approaches and single asset manager portfolios. The positive attributes of multi-management can become even more valuable for investors during times of heightened market instability.

SPREADING RISK ACROSS ASSET CLASSES, SECTORS, CURRENCIES AND REGIONS

While investing has no guarantees, diversification can help reduce the overall investment risk of a portfolio. Diversification means managing investment risk by investing in different types of investments such as shares, property and cash, across different sectors, currencies and regions.

Diversification helps smooth out responses to short-term ups and downs in the market. This is because it is unlikely that all investments will move in the same direction, at the same rate and at the same time in response to a specific market event. Fontanella said good portfolio construction seeks to spread investments in a way that delivers better risk-adjusted returns for investors – smoothing out volatility without reducing return potential.

We are living in a time when a lot of metaphorical rocks are being thrown – they are larger and launched more frequently than normal. We do not know when they will come or where they will come from, but it is probably a good idea to ensure your investment portfolio can withstand the impacts.

SPREADING RISK ACROSS ASSET MANAGERS

Just as we can apply diversification to asset classes, sectors, currencies and regions, so too can we apply it across asset managers. A multi-manager, or simply a manager of managers, constructs portfolios for investors by appointing the most appropriate asset managers to manage various parts of a portfolio.

Its skill lies in researching, selecting and monitoring those asset managers best placed to manage the assets of the portfolios constructed by the multi-manager. Benefiting from the expertise of several complementary asset managers can be another valuable means of fortifying a portfolio against such unpredictable rocks, keeping the risk of drastic changes in investment performance at a minimum.

A carefully curated multi-managed portfolio of diverse, best-of-breed and complementary investments and asset managers is an added layer of risk management, working together to reduce the impact of market turbulence on savings. This helps to produce more consistent and smoother returns. It also better positions investors to take advantage of the power of compound interest.

Genuine diversification can have long-term merit. The surest way to meaningfully outperform the market is not by chasing extraordinary gains, but by avoiding extraordinary losses. Portfolios that respond better to the motions of financial markets over time can help limit investors’ rand losses. This makes their savings
and investments more likely to compound into superior returns over time.

INVESTMENT PHILOSOPHIES AND STYLES

Asset managers have different investment philosophies and styles of money management. After all, asset managers compete against one another, with their biggest differentiator being their investment philosophy (i.e. standards or beliefs), dictating how they manage money on behalf of their clients, including what investments would constitute their portfolio.

Because we are all unique and have different views, it only stands to reason that a varying number of money management styles exist. To help make sense of the investment style universe, the table below (although not exhaustive) provides a brief description of the most common investment styles researched within the South
African asset management industry.

It is important to understand that different styles of money management excel at different times as financial markets move between cycles. This means that asset managers perform differently to one another at various stages of the market cycle, and that no single asset manager can outperform at all stages of the market cycle.

Pinpointing which asset managers will be the best and when they will deliver the best is easier said than done. Perfect foresight would be very nice to have, but this is not possible. Consequently, not all multi-managers are created equally. Multi-managers must rely on a structured, rigorous and repeatable asset manager research programme if the benefits of multi-management are to be realised.

A proven ability to identify asset managers with complementary and reliable performance cycles can give investors a greater chance of consistently capturing value-adding performance in different market cycles, simultaneously.

HELPING INVESTORS ACHIEVE BETTER OUTCOMES

Fontanella says that the multi-management benefits of portfolio fortification and responsiveness, together, can contribute toward better investment outcomes for investors.

Fully realising these benefits requires a multi-manager with significant specialisation in the areas encompassing asset manager research, portfolio construction, risk management and economic research.