With thousands of retirement funds flooding the market, staying on top of performance, styles, and trends can be risky business. It’s little wonder that more and more investors and advisors are leaving those decisions to a multi-manager.
Diversified across managers with complementary styles, multi-manager funds can not only limit “choice overload,” but may also improve risk-sensitive, long-term performance, allowing for more predictable outcomes.
But not all multi-manager funds are created equal. Fully realizing these benefits depends upon choosing a fund that knows how to “deepen the bench.” That includes demonstrating a rigorous process for:
- Independently screening and selecting industry leading specialized managers.
- Pairing distinct, yet complementary managers.
- Conducting ongoing monitoring and oversight.
The next few sections explore our approach to building single asset multi-manager portfolios in more detail.
Identifying and selecting industry leading global managers
To identify industry leading managers that have the potential to deliver long-term results while limiting volatility, we start by focusing on key quantitative measures such as rolling returns and batting averages, and then compare performance across market cycles versus style expectations.
We evaluate the length and severity of drawdowns as well as the extent of outperformance to uncover the drivers of performance and managers’ ability to deliver within expectations.
Managers that pass these quantitative reviews are then measured according to qualitative drivers such as:
- Investment philosophy and process as well as commitment to style consistency, including how style expectations match actual outcomes.
- How investment ideas are executed and implemented.
- Management team tenure and turnover rate to ensure stability and experience.
- Ownership and organizational structure to gauge firm stability and commitment.
The art of pairing managers with unique, complementary styles
Gaining access to industry leading managers is a key benefit of multi-manager funds. But understanding how to skillfully combine them may also contribute significant value in the form of risk control through enhanced style, portfolio, and business risk diversification.
In building the portfolios, we select managers with distinct, yet complementary styles within the same asset class. Because of differing views on stock selection and portfolio construction, they typically have minimal holdings overlap and low excess return correlation.
To fully leverage the benefits of broader diversification and optimize returns, we strategically allocate capital across managers within the funds by reviewing historical return data (absolute benchmark relative and peer relative), and risk/return across various market cycles. We round out this holistic process by incorporating our own insights into managers’ style and strategy.
This unique approach to portfolio construction gives managers the flexibility to build portfolios for specific purposes, allowing for more aligned, targeted outcomes.
Ensuring managers perform through constant, layered monitoring
For our portfolios to deliver, so must our managers. To ensure they stick to investment guidelines and mandates for their specific asset class focus, we constantly monitor:
- Daily holdings and trades, earnings growth rate, active share, and other metrics.
- Beta, tracking error, and standard deviation, measuring it against investment objective and style.
- Manager ratings across people, process, and performance, and results of quarterly investment reviews.
- Rolling, trailing, and calendar-year periods holistically to document convictions and concerns.
The bottom line: Look for a demonstrated, rigorous process
In an increasingly crowded retirement marketplace, multi-manager funds can offer several advantages over single manager funds and other investment vehicles, particularly for investors focused on achieving better retirement outcomes.
But to get the most of these benefits, it’s key to choose funds with a clearly demonstrated process for identifying specialized managers in specific asset classes, and have the capabilities to pair and monitor them
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