Multi-managers have always had a convincing and relatively straightforward story to tell - consistent long-term performance achieved through well-diversified portfolios that draw on a range of asset classes and manager styles.
In fact, the story has been so easily digestable for such a broad group of investors that fund managers, such as MLC, have built strong and lucrative reputations based on their multi-manager focus.
And there are no signs this is likely to change anytime soon. In fact, some are tipping even bigger growth in the immediate future.
"Historically, multi-manager funds have been the domain of small customers," BT Financial Group head of investment solutions Stewart Brentnall says.
"But I think a lot of that's changing. We are seeing the recognition of the expertise between multi-managers."
The past 12 months have seen a continuation of the strong and long-term inflows experienced by multi-manager or manager-of-manager providers over all investment cycles.
MLC, one of the longest serving providers of multi-manager funds says its net inflows over this period have exceeded $38 billion, reflecting the growth in the amount of investable money available in the market, the continued popularity of multi-manager funds and an increase in the number of multi-manager products now on the market.
"Fifteen years ago, 6 per cent of Australian investments were managed by seven manager-of-managers," MLC investment analyst John Owens says.
"At the end of December 2006, 25 multi-manager or manager-of-manager funds managed 17.4 per cent of Australian investments under management, including retail, wholesale and institutional money."
A big driver, of course, in the growth of any type of investment product is performance, a factor investors are particularly attracted to with multi-manager funds given their diversification across asset classes and investment styles.
Lonsec general manager of research Grant Kennaway, who is currently conducting the final reviews for the research house's annual performance comparison of single strategy funds versus multi-manager funds, says the latter funds truly stack up.
"Multi-managers perform in a more consistent manner than single strategy funds," Kennaway says. Of course, one of the criticisms of any investment strategy can be the level of management fees and the costs incurred to produce good performance.
However, Kennaway says such criticism cannot be directed at multi-manager funds.
"Fees aren't really a big issue. There is a perception that multi-manager funds are more expensive, but that's not the case. Multi-manager fees are in line with single-strategy funds," he says.
He says the average management expense ratio (MER) for a diversified growth option in a multi-manager fund is 0.85 per cent, while the average MER for a single-strategy fund is 0.87 per cent.
"Multi-manager funds tend to be very fee conscious. They only include managers and strategies that fit in their fee budgets, so you might not see the more expensive strategies such as hedge funds," he says.
However, one of the interesting developments in the multi-manager space in the past 12 months has been the increasing inclusion by product manufacturers of alternative investments, such as hedge funds and private equity, raising the question of what this does to the cost base of the funds.
BT introduced Grosvenor Capital Management's hedge fund of funds to its range of multi-manager funds in August last year followed by an allocation to AQR Capital's new Global Total Return Fund in December.
Brentnall says the inclusion of such funds in its multi-manager fund line-up has helped to differentiate its product offering from others in the market.
"These are truer alternatives. Using long/short strategies we would consider as traditional strategies," he says.
He says BT's Balanced Fund currently has a 9 per cent allocation to alternatives, compared to an industry average of 5 per cent.
So what has the introduction of these alternatives done to the cost base of multi-manager funds?
Brentnall says not a lot. He says while there are more expensive multi-manager products in the market, BT offers structured funds, which means it integrates less expensive strategies with more expensive strategies to manage costs.
In BT's Diversified fund offerings, the wholesale MER for its Multi-manager Balanced Fund is 80 basis points. It has a 70 per cent to 30 per cent income-to-growth split. Meanwhile, BT's Multi-manager Growth Fund, which has an 85 per cent growth focus, costs 93 basis points and BT's Multi-manager High Growth Fund is at 98 basis points.
Kennaway says the desire for multi-manager funds to differentiate themselves in an increasingly competitive space has led to the inclusion of less traditional investment strategies and asset classes.
"Multi-managers used to be a small sector, but now funds are looking to differentiate," he says.
He notes MLC's work with Vanguard focusing on tax minimisation - a strategy named Emulation - as an example of one multi-manager successfully differentiating itself in the market.
However, Brentnall says BT's inclusion of alternative strategies is not simply a "knee-jerk" response to competition in the market or the desire to differentiate its product.
Rather, he says it is the result of an "investment science strategy" to introduce broader asset classes and deliver more diversification benefits to investors.
"We want to produce the maximum amount of return for the minimum amount of price," he says. Another criticism of multi-manager funds is that it is common for the same fund manager names to pop up in the various products. However, Kennaway says if it does happen, it is the result of the dominance of particular fund managers in a particular asset class.
For example, in asset classes such as global bonds, Pimco is a common fund manager to be selected to cover this sector for a multi-manager fund.
This could also be said of AllianceBernstein, which in the past five years has become a dominant manager in the global equities space.
However, Kennaway says it is important to remember that for the retail investor market such fund names are not necessarily common knowledge.
Further, international equity fund managers, such as Marathon and William Blair, do not have direct retail funds, so the only way to access these managers is through multi-manager offerings.
Another factor influencing the range of funds on offer by multi-manager product providers is scale.
"Scale is the enabler in accessing different managers," MLC research analyst John Owen says.
"You may see managers who by name are the same, but they are being accessed differently."
For example, Owen says if you are a smaller entrant, you have a very good chance of simply accessing an "off-the-rack" option. However, if you are a player with $2 billion in funds under management, you can get a more tailored solution, such as purchasing a high-conviction portfolio.
This feature, Owen says, marks the difference between the "true believers" in the multi-manager style versus the "pretenders".
"The true believers are manager-of-managers whose core belief is that and that's all they do, while pretenders are the more recent market entrants, where it is not a core business and they don't have the research or the independence," he says.
The scale game plays another important role in the multi-manager space due to its relationship with fees and the underlying ability for provides to be profitable in this arena.
Kennaway says despite the attraction and popularity of multi-manager funds to investors and planners alike, they are not huge money spinners for their providers.
"They [multi-manager funds] are not providing a river of gold to the players. It will be managers who have the largest funds under management and scale who profit the most from the multi-manager structure," he says.
One of the ways to facilitate profitability in this space is for providers to only offer one multi-manager fund, that is, the fund they produce.
Kennaway says it is quite common for platform products to list only their own multi-manager funds. He says this is the case with Colonial First State's First Choice platform product where the only multi-manager funds available are Colonial First State products.
Despite the similarity in price and fund managers in some asset classes, for those that observe and operate in the multi-manager space, it is considered a dynamic sector.
Kennaway says over the past 18 months many multi-manager product manufacturers have in fact brought the manufacturing function exclusively in-house rather than using asset consultants to help assemble their fund line-up.
He says this can be said of BT, which formerly used Intech's asset consultants, and AMP and Skandia, which previously used Mercer.
"It reflects they want greater control," he says.
Another change from the past has been a reversal of the trend for multi-manager funds to favour in-house products to try and get greater market dominance.
"We are seeing managers provide a lot more flexibility to products. They have unshackled the teams," Kennaway says.
He says this can be said for product manufacturers such as Colonial First State and AMP.
Ultimately it is this latter trend that truly reflects a coming of age for multi-manager funds.
"The sector is maturing. If you're going to perform the best, you need to include who you want," Kennaway says.
