The debate rages on about the performance of active and passive fund managers. Internationally, a large percentage of passive funds which simply track a chosen index, have demonstrated that they have performed better and their costs are cheaper.
One of the counter arguments is that index funds only get average performance and not the out-performance that good, active managers can provide. It is not very easy, if at all, for ordinary investors to spot good fund managers?
But there are investment managers who believe they can. They are called multi-managers. Simply put, it is an investment fund where the fund manager selects a number of different investment managers to hand-pick the shares and other investment types for this fund. Hence the name, multiple managed fund. The multi- manager's role is to select and monitor the underlying investment managers to ensure they comply with the prescribed mandate and performance.
Many advisers are starting to realise that the complexity of picking fund managers - over 800 in South Africa (including Satrix funds) and 70000 internationally - means that to be truly effective, they sometimes need to partner with someone.
In many cases, that other party is a multi-manager. With all these available funds, the role of the financial planner is becoming harder, if not impossible. The secret of advising on investments is to outsource certain of the qualitative and quantitative aspects of a particular fund. Most financial planners do not have the time and it should be left to experts who have the time and staff to evaluate. To deliver above-average returns with below-average risk, find and monitor the right fund managers.
This does not eliminate the financial adviser. Their role changes and they need to assess each individual's requirements, understand tolerance for risk and ensure that regular meetings are held to understand whether any changes are necessary. Their job is also to educate and ensure that the investor understands all the risks, advantages and disadvantages of any investment.
Diversifying investments across different asset classes and different geographic regions enables a further potential reduction in total risk by reducing the unique risk that relates to a specific asset manager. This is another reason why I support the concept of multi-managed funds.
While the notion of combining different asset managers makes sense, in terms of further risk diversification, it does introduce the question of "which managers?"
There is clear evidence that selecting asset managers is a particular skill which can be used to add value.
The question you need to answer is: "Has the group of funds you picked done better than had you placed your money with a multi-manager?"
The key to consistently delivering above-average returns with below-average risk is finding and monitoring the right fund manager. Most people rely on their financial advisor to pick the right multi-manger.