Why the multi-management model works

Even at the best of times, markets can be unpredictable.

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Sudden shifts and impact events aside, the entire market cycle passes through different phases that make it virtually impossible for any single fund to unfailingly outperform in any class or sector. No matter the individual manager style. Therefore, a multi-manager or a fund of funds approach continues to be one of the most consistently successful ways to adjust risk and deliver better return on investment.

“The multi-manager model works by combining multiple performing funds into a single, secure offering.”

Purpose

These are funds that specifically invest in other funds rather than individual stocks and bonds. This essentially allows each fund to assemble a team of highly specialised experts to develop a portfolio of investments across the spectrum of funds in the marketplace. The multi-manager model works by combining multiple performing funds into a single, secure offering. A well-structured, well-resourced and well-researched investment philosophy applied to a portfolio of funds does more than look good on paper, it delivers consistently over time in real-world application.

The benefit of diversification

Multi-management funds enable any investor to obtain instant diversification across multiple variables: market sectors, asset classes, geographies and even management styles. This minimises the dependency on any given variable to deliver returns, mitigating risk by compounding the overall performance of the combined portfolio. Investors can look forward to protection from severe downturns while maintaining a stable rate of return. It is particularly attractive to the investor who has just enough to invest but falls short of being able to develop a fully diversified portfolio across individual funds directly.

The benefit of specialisation

Multi-management funds pool the expertise of multiple investment experts, with each fund manager devoted specifically to their unique area of expertise while maintaining awareness of their individual contribution to the overall fund structure. It’s also worth noting that the individual funds themselves, being specialists, have already conducted their own rigorous processes in researching, selecting and assembling their own assets and management style. All of which they actively continue to optimise independently of the multi-management fund. The result is multiple layers of active management, endlessly engaged in producing better returns.

The benefit of active management

Multi-management funds reduce the onus on the investor of having to find, research and invest in individual funds. It’s more than just that, though, it’s common sense. There is quite simply, no way any single investor can ever stack up to the total of expertise and real-world know-how of an entire team. Nor can they ever respond as quickly or effectively to sudden market shifts or events as dedicated specialists can.

Overall, it just places less demand, less stress on the investor, whether they are new to hedge funds or seasoned veterans. It’s an effortless way to achieve that crucial balance of appropriate risk and return.

Kagiso Matole, Portfolio Manager, Novare
Cost implications

Multi-management fund fees, on average, are nominally higher than those of single manager funds due to the multiple layers of cost attached to multiple layers of management. However, the decision to invest in a multi-management fund is a value-for-money proposition. Sure, it may cost a little more, but there is a lot more to be gained in terms of peace-of-mind and predictable returns over the long term.

One should also consider that multi-manager funds have substantial buying power, which allows them to negotiate on fees and access institutional share classes. This saving is also passed onto the end client, making the cost of ownership much less demanding.

Summary

Choosing a multi-management portfolio comes down to personal appetite for risk. While the function of funds of funds is to reduce risk, there remains varying levels of risk attached to various portfolios, depending on how they are constituted and managed. What you should look for is the right mix of these four key benefits that best suits you:

  • Consistent Returns. How well has the fund performed? How predictable is that return? Can the return be associated with a clear philosophy and process?
  • Risk vs Return. What diversification and active portfolio management is in place? How has the fund responded to both adverse systemic and non-systemic events?
  • Access to Opportunities. What products does the fund invest in which would otherwise be unavailable to you?
  • Fee Structure. Does the fund, for example, utilise lower-fee institutional share classes to reduce your costs?

At Novare, we offer multi-managed investment solutions in the form of South African funds of hedge funds, unit trust funds, an offshore fund of funds, and bespoke solutions. Depending on your unique needs, objectives and risk appetite, trust us to help you select the right fund for you. For more information, go to www.novare.com.