After steep market falls, is it time to trust the experts?

Professional fund-pickers can help pick up the portfolio pieces in volatile markets, but the trade-off is that these multi-manager funds come at a cost, writes Cherry Reynard.

As investors survey the wreckage of their portfolios in the wake of the coronavirus slump, they may be asking themselves some pertinent questions. Should I sell? Should I buy? What should I sell/buy? But perhaps one question will be louder than others: couldn’t I get someone else to do this for me?

Enter the multi-managers: fund managers who, rather than investing in portfolios of individual stocks, take positions in a selection of funds or investment trusts run by other managers (usually from different fund management groups). These brave souls will take on the job for you. They will decide on the right asset allocation and pick appropriate funds without you having to lift a finger.

However, this input comes at a price, and at a time of potentially low returns from stock markets, investors need to be sure they’re getting value for money.

In considering whether a multi-manager might be the right option for you, there will be a number of personal factors to consider: how much time you are inclined to devote to your portfolios, for example, and whether you are already a successful investor (some honesty needed), or whether the recent market meltdown has exposed some weaknesses in your approach.

The key advantages of multi-managers are their dedicated research teams and strong networks. This is their day job and they are constantly observing markets, interviewing fund managers and analysing new ideas, all activities difficult for a private investor to replicate. They may also be in a position to shape mandates to their own needs, by either being involved in the creation of a new fund or building a segregated mandate to their exact parameters. Thomas Becket, chief investment officer at Punter Southall Wealth, says its team works with fund managers to launch new funds and seed them.

Specialist solution

There are those who take this a step further. Nick Greenwood, manager of the Miton Global Opportunities investment trust, invests to good effect in parts of the investment trust market many retail investors avoid on the grounds of their complexity, liquidity or obscurity.

His portfolio currently holds Life Settlement Assets, for example, which invests in second-hand life policies, Phoenix Spree Deutschland, which invests in German residential property, and private equity group EPE Special Opportunities. These holdings could not readily be evaluated by a ‘normal’ investor, but Greenwood has many years’ experience in this type of specialist investing.

What’s more, multi-managers can access funds others cannot reach. The team at BMO GAM has been a strong supporter of Prusik Asia. The fund is closed to new investment, having reached capacity, but the BMO GAM team retains a holding. The same is true of top-performing fund managers such as the team at Findlay Park. Multi-managers bring a broader opportunity set to the table of private investors.

But is this important? After all, retail investors have plenty of choice, even if these specialist options are closed to them. For David Thomas, chief executive at Seneca Investment Managers, the key is to invest in “asset managers rather than asset gatherers”. This is an important distinction. The Woodford scandal has highlighted the problems of ‘best buy’ lists, which tend to direct investors to large, well-known funds run by high-profile asset managers. Yet size can be a barrier to strong performance, particularly in sectors such as smaller companies or emerging markets.

Many multi-managers will also talk about the access they have to fund managers. Of course, fund managers will record podcasts, share insights and deliver newsletters, but multi-managers are usually able to pick up the phone, ask probing questions and expect reasonable answers. The difference may not be the quantum of access, but the nature of it.

This can be particularly valuable in markets such as those of the past few weeks. Becket says: “At a time like this, we can pick up the phone and fund managers tend to be keen to keep our capital in the fund. We get their views, how they are positioning the fund.”

John Chatfeild-Roberts, head of strategy for the Jupiter Independent Funds team, says: “This information advantage is key. In the past two weeks – and in spite of working from home – we have had virtual meetings with key fund managers in our portfolio, such as Evenlode, Fundsmith and Findlay Park. We have been going through our portfolio with a fine-tooth comb and we can find out exactly what the managers we hold are thinking right now.”

Equally, at a time when fund managers are still only obliged to make public their top 10 holdings, multi-managers have access to their full portfolio, plus technology that tells them whether a manager’s portfolio reflects their stated objectives. Are they claiming to be a blue-chip manager yet with a portfolio full of niche technology companies, for instance, or a value manager holding growth stocks?

Multi-managers will also know how to interpret the information they are given. Thomas says: “We dictate the terms on which we meet these managers. We don’t just sit there and listen to the presentation. We tell them what we think, and they can challenge us on that basis.”

Chatfeild-Roberts says this interpretive element was important in avoiding the problems at Woodford Investment Management. He says: “Even though Neil Woodford printed his full portfolio on the web every month, to some extent, the problems were hiding in plain sight. If investors had the time and inclination, they could have looked up the portfolio and worked out the problems ahead of time. But why would they when they think they’ve picked someone who knows what they’re doing?”

It is worth noting that, with the exception of the Hargreaves Lansdown in-house team, no major multi-manager held Woodford Investment Management funds at the time the funds closed. Chatfeild-Roberts held a £300 million stake in Neil Woodford’s flagship income fund in the early years, but began selling the stake in late 2015 as he saw liquidity problems emerging.

Eye for liquidity

Indeed, multi-managers will generally have a keen eye for liquidity. For Chatfeild-Roberts, this was a lesson learnt early in his career when he was ‘stuck’ in a smaller companies portfolio – inherited from the previous manager of his fund – for more than two years. In general, multi-managers have avoided the problems seen in open-ended property funds, which have had to close to redemptions on liquidity grounds.

Better access and information as well as more experience in interpreting that information may be useful on a day-to-day basis. But can this protect a portfolio in difficult times? Would investors have been better off with a multi-manager in recent weeks as the coronavirus crisis hit markets?

Naturally, that depends on the multi-manager. On the upside, multi-managers generally won’t be panicking like mad, selling all their holdings and keeping their cash under the bed. Discipline in difficult markets is an underrated virtue. It can help managers avoid some of the basic behavioural mistakes that tend to cost private investors dear in difficult markets: panic selling at the bottom of the market, for example, or frantically re-allocating to safer assets after the horse has bolted.

For Thomas, this is what a multi-manager can bring. He says: “We have consistency of purpose. We have investment values we hold on to and apply consistently. We stick to our convictions, and when the going gets tough, we have a formalised investment process.”

Solidity and experience

In general, investors can expect their multi-managers to be calm in the face of disaster. Chatfeild-Roberts says that in evaluating a response to the crisis, it helps to have worked through previous crises. He says: “On a single day during the recent market volatility, the US market was up 9%. We are pretty sure that is a dead cat bounce, which happens in bear markets. It doesn’t mean the market is going to spring back from here. Unfortunately, that is only likely to happen in the wake of the most appalling news. In this instance, the experience of having gone through similar events is invaluable.”

At Seneca, the team’s approach has been to be in regular contact with the underlying managers within their portfolios as the crisis has unfolded. Thomas says: “As value investors, when the world is frightened, we want to buy. We will tend to be on the other end of the trade. As long as investors can keep their nerve, this type of market will always present long-term buying opportunities. This is the time when careful and selective buying can help deliver long-term outperformance.”

Chatfeild-Roberts was extremely cautious going into the crisis: he holds no smaller companies or emerging market funds and only a small exposure to Asian funds. He has limited his stock market exposure to funds investing in growth and to high-quality companies. Moreover, he has built a large weighting in gold, which has added solidity.

This sounds great in theory. However, inevitably, multi-manager investing brings another layer of fees, even if costs are considerably lower than they were just a few years ago. Among the most high-profile multi-manager funds, the Jupiter Merlin Balanced Portfolio has an ongoing charges figure (OCF) of 1.56%, while the BMO MM Navigator Balanced fund has an OCF of 1.74%. However, some companies have brought out low-cost ranges, which usually incorporate some passive funds. The BMO multi-manager team’s Lifestyle range has an OCF of around 1%, which is not much higher than a standard active fund would charge. The entirely passive Vanguard LifeStrategy 60% Equity fund has an OCF of just 0.22%.

It is difficult to judge whether multi-managers have had a ‘good’ downturn when we are only a month (at the time of writing) into this unexpected and alarming crisis. That said, looking at the IA mixed investment 40-85% shares sector, where many multi-managers house their flagship funds, it seems many funds  have been good at minimising the impact of market volatility. The average fund is down by 14.9% over a month (source: Trustnet, as at 26 March), compared with a drop of 23.3% in the average UK equity income fund. The multi-manager approach brings a natural balance and diversification to portfolios that matters in times of weakness.

Top multi-manager funds offer protection in precarious times 

Note: Table shows performance of selected multi-manager funds from IA Mixed investment 40-85% shares sector. Source: Trustnet, as at 31 March 2020

Potent tool set

Multi-managers will have more tools at their disposal during times of turmoil than private investors will. Neil Birrell, manager of the Premier Diversified Growth fund, for example, has had trades on the Vix index and puts on the S&P 500, which has helped his performance in the current conditions.

Chatfeild-Roberts says his team will make use of selective currency hedging to minimise volatility in its portfolios, while others design specialist structured products to minimise portfolio volatility.

A good multi-manager should be able to take the strain, but inevitably, there is a price to pay for their expertise. Costs have come down and are substantially lower than they are for a discretionary investment management portfolio, but they can still act as a drag on returns. Ultimately, investors will need to decide for themselves whether having someone else do the investment thinking for them is worth the additional cost involved.

DIY investing vs the multi-manager alternative

Tax: Private investors can incur capital gains when they sell portfolio holdings held outside a Sipp or Isa. Selling within a collective fund structure does not create a tax liability and investors only pay capital gains on exit.

Cost: Private investors investing in collective funds only pay one layer of charges. Multi-managers often add as much as 0.5% on top of this. However, they may receive preferential rates on the underlying funds.

Personalisation: Multi-managers tend to work to broad-brush risk models, so they may not be able to accommodate investors with very specific needs or preferences. That said, they can be useful as core holdings, with investors keeping aside a more ‘experimental’ pool of cash.

Sustainability: Only a handful of multi-manager sustainable funds are available – although more are being launched all the time – so choice is limited. Investors wanting a ‘pure’ sustainable portfolio may have to cherry-pick their own funds.

Time and experience: For a multi-manager, selecting funds and managing asset allocations is their day job. They have seen bull markets and bear markets, and everything in between, so they are able to avoid the behavioural mistakes private investors often make when financial markets are moving quickly.

Balance: Private investors are drawn to areas that they know something about. This can enhance returns but also leave their portfolios lacking diversification, which often means they are found out in tough conditions.

Breadth: Some high-quality managers aren’t available to retail investors. Multi-managers can mobilise significant funds and will have access to a broader range of funds.

Control: Some investors like to be in control of their investments. Investing in a multi-manager fund cedes control to someone else, so a private investor must feel able to trust such a fund.