Many multi-managers cut their teeth as direct fund managers, learning the analytical skills that are essential to their current jobs.
Ian Aylward, head of funds research at Aviva Investors, was a UK equities fund manager for five years before switching to the multi-manager space 15 years ago. ‘This move has proved invaluable in helping me to appraise fund managers,’ he said.
Aylward gained his insights working at CIS Asset Management and Rothschild Asset Management as a direct analyst and then portfolio manager of equities.
‘[My experience] enables me to take slick presentations and portrayals of faultless processes and team dynamics, which we’re sometimes provided with by fund groups, with a pinch of salt,’ he said. ‘No business can be in a state of permanent harmony, and processes can be flexed on occasion.’
He said his in-depth knowledge of individual stock fundamentals and methods of appraising companies had also proved useful when quizzing managers on their holdings and rationale.
Citywire A-rated David Coombs, head of multi-asset investment at Rathbones, focused on individual equities and bonds in the first half of his investment career, managing pension funds, offshore family trusts and captive insurance funds for 13 years before becoming a multi-manager in 2004.
‘Having had that experience, I’ve come to believe that analysing a fund is very similar to analysing a company, particularly one that has multiple divisions and a diverse set of businesses,’ he said.
‘You analyse the quality of the management team, the external factors that might affect the stated strategy, the future relevance of the business and the numbers: relative and absolute valuations or returns on capital employed.’
Today, Coombs builds portfolios of specialist active funds using a ‘pure’ approach (allocating capital to one manager per strategy instead of blending managers), which he complements with passive funds and direct bond holdings.
‘Many of the former are boutiques, where lower levels of funds under management and a focus on investment rather than distribution give them an edge. In essence, they’re easier to analyse, much like a single-business company,’ he said.
Despite clear similarities, running multi-manager portfolios that encompass a wide range of asset classes and instruments is often more complex than running a direct equity, bond or property fund.
‘This requires a level of expertise that is the equivalent or greater than that of many direct managers,’ said City Financial head of multi-asset Mark Harris (pictured), whose background is as an asset allocator and multi-asset manager.
‘While a large swathe of direct managers can demonstrate extremely granular detail on the securities they cover, they often rely on that with a level of overconfidence in outcomes. They omit an appreciation of the wider operating environment and relevant macro drivers, which can dominate their style,’ he said.
He believes multi-managers are more often appreciative of risk, asset price and style drivers.
‘This has important consequences, as they appreciate the cyclical nature of styles and are agnostic on which styles deliver returns,’ he said. ‘Some just neutralise this effect and search out alpha, while others manage the style factors, such as size or growth versus value within the context of their risk budget.’
Harris said the challenge of multi-manager investing was among the reasons why he had never run a direct fund. He can invest in shares of exchange-traded funds and investment trusts, and use derivatives where appropriate. ‘I can see that each discipline has its merit, but I’ve no desire to be a typical direct manager,’ he said.
That is also the reason why Coombs would not go back. ‘Given the choice, I could become a single strategy manager [again]. I have no ambitions to do so. My passion lies with the variety that multi-asset continues to offer,’ he said.
Coombs sees ‘very little difference between a multi-manager and a direct manager’, while Harris questions whether there is ‘any longer a great distinction’ between managing multi-asset portfolios and managing direct bond, equity or property portfolios. Given the growth in the multi-asset space, more and more direct fund managers are casting their nets wider.
However, for Aylward, switching from one to the other is not a simple task. ‘It would be incredibly difficult to move from being a multi-manager to a single strategy portfolio manager as the skill sets are very different,’ he said.
‘Besides anything else, one needs an in-depth knowledge of stocks or bonds while the other needs an in-depth knowledge of fund managers.
‘In a world of massive amounts of information and specialisation of roles, it’s simply not possible to make the switch without a very significant transition period.’
He sees greater synergies between being a multi-manager and being a chief investment officer, two roles fulfilled by John Chatfeild-Roberts at Jupiter Asset Management.
‘Both roles involve leading teams, having a knowledge of investment processes, being cognisant of the importance of a firm’s culture and having empathy for poor periods of manager performance – essentially understanding what makes an asset management business tick,’ said Aylward.