Issue: September/November 2008

Managing the managers . . . a key task that requires an expert

Hiring expert help is critical to fund success, but how do non-specialist trustees ensure the specialists are up to the job? Columnist FLORBELA YATES, from STANLIB Multi-Manager, outlines one solution in the realm of fund management.

Who guards the guards? In the context of a retirement fund’s investment performance, the classic conundrum could be restated as ‘who manages the managers?’

Trustees obviously have overall responsibility, though regulators accept that professional advice is often necessary in areas of specialist expertise such as fund management.

The challenge is how best to create a system of cost-efficient scrutiny of fund managers while avoiding overlap and duplication. At the same time, solid returns have to be delivered and sustained

An approach with growing appeal is the use of a multi-manager that for a single fee delivers multiple services such as scrutiny of performance against mandates, risk management through prudent diversification and wide-ranging ‘hire-and-fire’ responsibilities, covering the selection, appointment, performance appraisal and (when necessary) replacement of individual fund managers.

A key task of the multi-manager is the ‘blending’ of individual fund managers into a complementary mix capable of meeting strategic objectives. This entails the balancing of several different investment styles.

Different styles – growth, value, momentum, etc – are favoured by the market at different times. Therefore, style diversification can help to manage downside risk and smooth a portfolio’s performance in changing market conditions. The intention is long-term capital growth for acceptable risk.

The local-term focus helps to explain the growing attraction of multi-management for retirement funds and their trustees.

The need to ensure fund sustainability through liability-driven investment imposes a long-term mindset on conscientious trustees. As a result, funds traditionally engage in prudent pursuit of optimum risk-adjusted returns. The multi- manager is on the same quest.

Trustees may lack the expertise to select appropriate managers, monitor them and replace them when that is in the best interest of members. However, the authorities expect these functions to be fulfilled.

Some technical issues also warrant close attention, such as upweighting and downweighting of each manager’s portfolio allocations. When should this be done and to what extent?

The demands on a trustee are testing. Yet skills such as this are core competence for a well-resourced multi-manager.

The multi-manager has the ability to identify managers with both a proven track record and a sustainable business model capable of delivering results in line with a fund’s long-term objectives. An appointment is not a ‘beauty contest’; it is a challenging technical exercise conducted by an expert.

The multi-manager is also equipped to decide on the flow of funds to each manager and technical issues relating to portfolio construction.

Many trustees appreciate the risk of placing too many eggs in one basket and may give two or more managers a portion of the fund’s overall portfolio. But they are rarely able to ensure a proper blend. Duplication of styles can compound rather than mitigate risk.

The value of asset-class diversification is also apparent to astute trustees, but selecting ‘horses for courses’ by identifying leading managers in each area can be a challenge. Again, this function can also be left to the multi-manager.

Of course, even managers with a good record can fail to live up to expectation. In the past, trustees may simply have sacked a poor performer, liquidated the portfolio and banked the proceeds while looking for a replacement.

Brokerage costs can be high when this approach is adopted. In addition, a considerable lost-opportunity cost might accrue should the fund be out of the market at a time when equity gains are in the offing.

A multi-manager can ‘transition’ the replacement process and engage in scrip transfers across the pool of managers to reduce brokerage costs.

For example, regulatory changes impose a duty on trustees to ensure compliance by all its fund managers. A responsible multi-manager scans the horizon for legislative change and ensures continual compliance at fund management level as a matter of course.

A continual scan of the investment industry is also maintained.

The multi-manager is aware at an early stage when personnel changes affect a fund manager, when new investment boutiques are about to be launched or when new investment opportunities are about to emerge.

Market intelligence like this can be highly beneficial for funds assisted by a multi-manager.

Florbela Yates

Constant scrutiny, multiple skills and the convenience of dealing with one set of professionals make a powerful case for the multi-manager model. Clearly, a professional fee is levied for professional services, but the delivery of so many services from a single source can more than justify the outlay.

At least, that is the experience of a growing number of pension funds

Florbela Yates is investment marketing manager of STANLIB Multi-Manager, the multi-management arm of STANLIB, SA’s top- performing asset manager.