There is an African proverb that says, ‘It takes a village to raise a child’, reminding us that for a child to grow into a well-rounded and successful adult, the whole community has a role to play in their growth and development. The basis of this concept is that a parent cannot realistically raise a child without the support, involvement, input, and advice of those in the community which would include family members, friends, community and spiritual leaders, and role models. Applying this analogy to financial planning, it is almost impossible for a financial planner to be all things to their clients, which is where the unique skills and expertise of multi-managers come into focus.
Also known as discretionary funds managers or portfolio managers, multi-managers are essentially a team of investment specialists who select and manage a diversified mix of investment strategies on behalf of clients. This approach provides investors access to a broader range of investment expertise and specialist portfolio management skills which, in turn, can achieve more favourable, risk-adjusted outcomes for the client. A key function of a multi-manager is to research and analyse funds offered by various asset managers, both active and passive, to construct a portfolio that is aligned with a specific investment objective. In this regard, an investment mandate may be in respect of a pre-determined set of investment returns required by a client in order to achieve their goals or may take the form of a bespoke portfolio design constructed in accordance with a client’s assets and investment holdings. As such, a multi-manager therefore does not directly handle invested funds but rather allocates a client’s capital strategically to carefully selected funds in line with the agreed investment mandate.
In the absence of an appointed multi-manager, a financial advisor and client would need to meet on at least an annual basis to select underlying funds, make changes to asset allocation, and re-balance the portfolio. The drawback of this approach is that fund selection and asset allocation may become inappropriate as and when markets respond to global politics, natural disasters, or economic uncertainties, such as resulted from the Covid-19 pandemic, the war in Ukraine, and South Africa’s power crisis. International politics may make exposure to certain geographical locations less desirable for investors, whereas union strikes and natural disasters, such as flooding or severe droughts, can wreak havoc in certain market segments and result in negative yields.
As such, using a multi-manager can counter the effects of short-term market volatility as the multi-manager moves assets between funds in response to local and global events. This re-calibration of a client’s investment portfolio provides an element of investment flexibility while still adhering to the client’s investment mandate. Much like any sports team, each asset manager has a culture and identity that can make it stronger or weaker depending on market sectors and conditions. With the ability to move between funds as and when markets fluctuate to take advantage of prevailing conditions, this dynamic approach allows multi-managers to make decisive and timeous decisions to adjust the underlying investment strategy accordingly.
By way of summary, a multi-manager approach can benefit individual investors in the following ways:
- Diversification: By investing in a range of asset classes, sectors, industries, and jurisdictions, multi-managers can optimise diversification and reduce the risks associated with investing in a single investment. This approach can also provide local investors with a wider array of investment opportunities.
- Risk Management: Through the use of sophisticated management systems and processes, multi-managers are able to continuously monitor, assess, and adjust strategies so as to remain aligned with the client’s investment mandate and to help mitigate losses during market downturns.
- Expertise: Clients using a multi-manager investment approach are able to access the collective expertise of highly skilled investment specialists who are better equipped to navigate market complexities and make informed investment decisions.
- Flexibility: Another significant benefit of the multi-manager approach is the innate investment flexibility which allows multi-managers to tailor-make investment strategies that are fully aligned with a client’s investment objectives, and to rebalance these portfolios as and when circumstances dictate.
- Cost: By using their bulk purchasing power, multi-managers are able to negotiate reduced fees with underlying fund managers, with these discounts being passed back to the investor. South Africa has several highly reputable multi-managers who provide cost-effective multi-manager solutions for individual and institutional investors. As a rule of thumb, investing through a multi-manager – including the investment fees of the underlying asset manager – should cost no more than if you were to invest directly with the asset manager.
While multi-managers offer these and other advantages to investors, keep in mind that it remains essential to conduct your own due diligence and to consider all factors such as fees, track record, historical investment performance, and the overall alignment with your investment objectives when selecting a multi-manager.
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