Multi-managers are an established feature of the asset management scene having evolved over the last 15 years to become a useful tool in a portfolio diversified not only by asset class but by provider.
As appetite for private market has grown, multi-manager -or fund-of funds as they are also known – have allowed these assets to be combined into a single coherent offering.
Yet these strategies bring extra layers of complexities and providers may find they have conflicts of interest, particularly where investment consultants offer fund management alongside their advisory services.
Kathryn Saklatvala, Senior Director and Head of Investment Content at bfinance and co-author of the consultancy’s June report Rise of the Allocators: Multi-manager Strategies for Alternative Investing, says that while conflicts of interest are inherent in all fund management, there are particularly prevalent in the multi-management sector.
“We absolutely recognise the appeal of these models, but they come with a health warning. These are more complex strategies and every layer of removal you get between the investor and the assets, adds more potential for conflicts of interest to creep in,” Saklatvala says.
Saklatvala argues that it is “attractive” for managers to package a diversified product line as a one-stop shop, but she says investors need to make a distinction between those managers offering true diversification which includes external funds and ones that see the structure as an opportunity to drive assets to their own offerings.
Bfinance reports that the use of internal product “is widespread in all models” apart from single asset class fund-of-funds “and it is becoming more common there”.
Saklatvala says: “We see plenty of space for [the use of internal funds] but investors need to understand the levels of competence across the piece and scrutinise all the competing types of products. They need to look for those conflicts of interest and ensure they have material checkpoints.”
Bfinance recommends investors assess the manager’s approach to underwriting and consider whether the merits of in-house strategies – including fee discounts, strong interaction, easy-to-aggregate reporting – outweigh the opportunity cost.
The consultant also warns investors to watch for conflicts of interest where the lines are blurred between advice and investment.
The report says: “Where the same provider is offering both advice and implementation of that advice, investors must be careful to ensure that decisions are robust on both sides. This can be particularly difficult when the provider is the institution’s investment consultant.”
Saklatvala says the challenges become bigger when an adviser recommends a strategy that may be particular to its own organisation, driving the investor to make a decision which is in the consultant’s interest rather than their own.
“This is an area where investment consultants have not had much scrutiny. The regulator’s focus has been on fiduciary management where consultants have responsibility for the entire portfolio, but not where they provide asset management for a portion of it.”
She continues: “Questions should be asked when a consultant manages any part of the portfolio, no matter even if it’s only in private markets or illiquid alternatives. There should be the same level of scrutiny.”
