Multi-Manager is it worth the hassle?

Multi-Manageris it worth the hassle?

Peter Fitzgerald CFA

Index

• What is Multi-Manager• The Challenges• Active v Passive• Asset Allocation v Manager Selection• Manager Selection• Blending• Costs/Benefit

What is Multi-Manger

Overall Portfolio

Manager ZInstitution A

Manager YInstitution B

Manager XInstitution C

Why Multi-Manger

Fund/Manager selection is not easy

Monitoring is time consuming

Blending is not straightforward

Regulatory pressuresRetail Distribution Review (RDR)

The Challenges

Funds: 27000+

Quoted stocks: 624 in UK

Source: Morningstar & Bloomberg

Active Management can work

Asset Allocation v Manager Selection

90% of relative returns do not come from asset allocation

Manager Selection:Can’t do it on the cheap

The sources of manager selection risk

Risk Exposure Style Bias Luck Skill

Financial LeverageBeta LeverageConcentration of Returns

Growth / Value BiasSmall Cap BiasSector Bets

Manager InterviewsUnique InsightsTeam / Process

Success Going ForwardTeam Continuity

Quantitative Qualitative

Quant/Historical PerformancePeer Group Annualised

returnCumulative return Alpha Annualised

Fund 3yr (to end of 2011) Second Quartile 17.62 62.73 0.24

Benchmark (to end of 2011) - 17.00 60.15 0.00

Rolling alphaRolling 12 Month Alpha vs MSCI EM NR (3 yr to end of 2011)

2010 2011

12.50

10.00

7.50

5.00

2.50

0.00

-2.50

-5.00

Investment Name

Source: Morningstar Direct

Quant/Historical Performance

Fund 3 yr (to end of Sep 12)

Third Quartile 3.56 11.07 (1.86)

Benchmark (to end of Sep 12)

- 5.30 16.75 0.00

Rolling AlphaRolling 12 Month Alpha vs MSCI EM NR (3 yr to end of Sep 12)

2010 2011 2012

0.75

0.00

-0.75

-1.50

-2.25

-3.00

-3.75

-4.50

Investment Name

Source: Morningstar Direct

Manager Selection

• Robust framework for:– Selecting– Monitoring– Replacing

The 6Ps

Blending Mangers

Blending Mangers

Traditional Blending

Small Cap Growth

Large Cap Growth Large Cap Value

Small Cap Value

Alternative Blending

LT stock picking stock trading

LT macro rotation

Turnover

Allocation Effect / Selection Effect

100% 150% 200%50%

Cost/Benefit

0.25

0.250.6

0.1

Costs

Manager SelectionAsset AllocationUnderlying ManagerOther

Some Examples