Streamlining multi-manager investing

For the past 40 years, Russell Investments has gained a respectable world-wide reputation for pioneering the multi-manager approach. The firm’s investment philosophy, which is known as Multi Asset Multi Style Multi Manager, is based on the selection of best-of-breed managers and the careful blending of different investment styles in each asset class. The wise concept of “not putting all your eggs in one basket” assumes an importance even greater in today’s very volatile market conditions, as combining managers employing different strategies typically results in better risk-adjusted returns. Moreover, the multi-manager approach allows the underlying retail investors to get access to some of the best investment managers that may only be willing to manage mandates significant in size for large institutions. PWM: What are the main benefits of investing in manager of manager funds as opposed to funds of funds? Lim Meng Tat: Manager of managers is definitely more cost effective as we hire managers on a sub-advisory basis and we just pay them a fee; in funds of funds you introduce an additional layer of cost by investing in existing funds, which would already have an infrastructure cost. Also, in manager of managers, as opposed to fund of funds, we have good control over the way the money is invested and, to a certain extent, we can also decide who should be the fund manager. Transition efficiency is another key area: if we are not happy about a particular fund manager that we have appointed, we just replace him and appoint a new one to take over the portfolio. There is very minimal transition cost, unlike in funds of funds. PWM: What are Russell’s major challenges in promoting the manager of managers approach in Asia and how successful have you been so far? LMT: Investors in the more advanced markets in Asia are very savvy in product shopping, but they tend to chase the hot flavour of the month, which is very short-term. Our goal is to educate the sales channels and advisers, who have a big influence on investors, about the benefits of a diversified portfolio built to achieve certain investors’ life goals. These could be your children’s education or your retirement. Sales channels will have to change their mindset and move from the transactional commission-centred approach to an ongoing fee-based structure. We have key partners in Singapore, such as Prudential Insurance. In Taiwan we partner with Polaris Securities, a brokerage firm which aspires to enter the wealth management space and hence they work with us. We believe we need to spend a lot of time with our partners and that means that we have to be very selective; we will work with those firms that are very committed to make this transitioning process happen, leveraging on our expertise. In terms of portfolio construction, we manage the global mandates and our partners manage the domestic or regional mandates; there is a joint collaboration and a joint ownership of the fund that we set up together. Some partners also would ask us to help them do the asset allocation strategy and we are happy to do it. In Asia, more than in other parts of the world, investors have a very strong home bias. PWM: How is the core-satellite approach implemented in Russell’s multi-manager funds? LMT: At Russell we do not create a product just because it is sexy or because it is the hot product of the month. We believe in the core satellite way of investing. The core strategy of a portfolio has to be fundamentally sound and deliver consistent risk-adjusted returns. For that, we offer five ad-hoc multi-manager multi-style balanced portfolio funds, which address a variety of return objectives, risk profiles, time horizon and lifestyle goals. The exposure to equities in those five portfolios ranges from 20 to 90 per cent. The satellite part of a portfolio is, to some extent, the more speculative way of investing, aiming to give quick returns; the products are also a lot more volatile. Recently, we have launched four new sector funds, which we consider satellite; these are: world equity, emerging markets equity, pacific basin, including Australia, and pan-European equity, which is more of a growth story. What we say to our partners is that the core-solution must represent at least 50 per cent of an investor’s portfolio, as any lower percentage would not have a very effective impact in satisfying the client’s basic and long-term needs.