The investment world can seem complicated, for new and seasoned investors alike. Whether it is a central bank announcing a policy change, countries threatening each other on trade issues, an unforeseen election result or an individual company announcing a change in management, an investor needs to be on the ball to deal with the impact these events might have on the investment.
In an environment where world markets are constantly developing, picking the right fund manager might not be the easiest of tasks. A suitable way to mitigate the burden from all the noise coming from world markets is by using multi-manager investment funds.
A multi-manager fund is a single fund which invests in a number of professionally-managed mutual funds. Rather than investing directly in shares, cash or bonds, the fund invests in a selection of other managed funds. These funds are usually managed by several different fund managers each with different mandates. Depending on the investment objective, the funds may focus on one asset class or several. They’re designed to reduce the risk of picking up the wrong manager by spreading the selection of managers across different investment houses.
One of the key benefits of a multi-manager fund is the extra level of diversification this provides. Investors gain access to all the usual benefits of a managed fund, such as company diversification and management expertise, with the added layer of diversification by fund manager. This is important because not all fund managers perform equally in all market conditions. By diversifying across fund managers, exposure to the performance of a single fund manager is reduced.
As the multi-manager sector has grown, so have the opportunities available to access this investment approach. In fact, in order for multi-manager funds to be able to stand out from the crowd and manage to beat their respective index, a diverse multi-strategy concept can also be applied.
The investment world is getting more complex
Style diversification in a multi-manager context refers to pairing different managers with distinct and clearly differentiated styles and thus diversifies the source of value-added relative to a single manager’s style. The benefit here is that if one manager is out of favour, the other(s) may be in favour.
Apart from managed funds, a multi-strategy portfolio will also hold passive instruments like exchange traded funds (‘ETF’).
An ETF is a fund which trades on the stock exchange, like a share, however will be structured like a fund in order to be able hold different underlying securities. The ETF will therefore offer the required diversification by passively tracking a particular index rather than being actively managed.
The benefit here is that the multi-manager approach can be tilted towards a particular theme or strategy based on the present economic cycle by blending the expertise of actively managed funds with sector specific ETFs.
For instance, if we look at the current context whereby sluggish economic growth and other economic signals are showing that the longest ever bull market is likely coming to an end with a recession on the horizon, it might be worthwhile tilting the portfolio towards more defensive assets like healthcare and consumer staples which might benefit relatively to other sectors during such cycle.
Another interesting feature of multi-strategy portfolio management which has been gaining steam is momentum investing. Momentum investing is a concept based on the idea that money could be made by taking opportunities out of trending markets. With momentum investment, the trend is your friend! In fact, various academic studies have shown investing in shares that exhibit this momentum factor could outperform the market over the long term.
Momentum investing suggests that investors are susceptible to several behavioural biases. This is in the sense that they tend to over/under react to new information being incorporated into an asset’s price, tend to follow investors following the same trends and are inclined to justify transaction decision using recent share price activity.
As the investment world is getting more complex and market events keep on putting pressure for investments to deliver, a combination of multi-manager, multi-strategy approach should provide the necessary reassurance to deliver an acceptable return whilst mitigating risks.
Christian Buhagiar is a portfolio manager at BOV Asset Management Limited
The writer and the company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate.