Does your multi-manager give you added value?

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Adriaan Pask, CIO at PSG Wealth

All investors want market-beating returns, preferably at acceptable levels of risk.  Savvy investors also want good value for money because they know that fees can be a drag on returns.

As they are essentially institutional investors, multi-managers are in a good position to deliver value for money.  They typically have a sizeable asset base which puts them in a strong negotiating position when it comes to the fees they’re charged by the underlying managers, to the benefit of investors. Of course, they can also choose the best managers, which also assists with achieving market beating returns.

“Ideally, any savings that a multi-manager can negotiate on behalf of its investors should go directly back into the fund to enhance its return,” says Adriaan Pask, Chief Investment Officer at PSG Wealth.

When negotiating, multi-managers can also use the opportunity to remove all performance fees that underlying managers would have charged normally, thereby adding further value and enhancing returns. “Performance fees can have a very negative impact on returns, particularly over time, so being able to ameliorate them in a multi-manager vehicle makes good sense,” Pask says.

Then, when adjusting performance for risk, your multi-manager can perform a review of his or her fund’s performance, adjusted from price. This is done by dividing the return above the peer group of a fund by the cost of that fund, to determine how efficient the multi-manager was at using fees to generate excess performance.

In the case of PSG Multi-Management, its excess performance continuously fluctuates, broadly speaking, between 2% and 3%. That brings the value for money to a consistent 2% above peer groups.

In some cases, other managers may generate 2% of excess performance (which is good), but then they charge a fee of 2% for that outperformance, essentially reducing the value for money to a ratio of 1.

“While some investors might not consider this poor performance, more efficient alternatives are available.  For similar reasons, we believe that active managers have a compelling investment case, if their value for money indicators exceed those of passive alternatives. However, this is a debate for another day.”

Other ways that multi-managers can add value is by addressing some of the common pitfalls associated with investing.  For example:

Because they outsource the investment management process to a third party that can make objective investment decisions for the right reasons, the multi-manager structure helps to mitigate the likelihood of investors making emotional investment decisions and switching out of a fund too quickly, for example, a decision that can detract from performance over time.

Capital gains tax (CGT) is not triggered when portfolio changes are required, as the fund structure does not require tax at the date that a portfolio manager makes changes to the portfolio. CGT usually gets triggered when an investor moves his money (switches) between funds before the life of the investment ends. By not triggering CGT, multi-managers are able to grow investor’s initial capital more vigorously, allowing compounding time to benefit clients. It also means the portfolio manager is not deterred in any way from making sure that investment positions remain optimally structured, i.e. the multi-manager can make changes to a fund as circumstances change in the macro and/or market environment.

Removing the possibility of counterproductive services. For example, if your multi-manager is part of a financial services company that also offers investment advice through, then its investment solutions can be purpose-built to serve its financial planning philosophy.

Counterproductive administration fees can also be combatted if the multi-manager has a platform business (LISP).  This reduces cost, further enhancing the value to investors.

Add some strong qualitative attributes and you have products that can add value to investors in a sustainable manner.

So even though the fees associated with investing in Fund of Funds need to be taken into consideration, there are many other benefits that need to be taken into account. Seeing as fees are easy to explain, most people focus on them – perhaps too much. It is, however, important to illustrate the other benefits that multi-management solutions offer clients. Benefits that assist clients in achieving long-term wealth.

“While managing costs in a portfolio is not the only benefit derived from investing in a multi-managed fund, it is an integral part of managing wealth portfolios,” concludes Pask.