Do multi-asset strategies provide value for money?

Ciarán Mulligan: It is very hard to assess if they are value for money or if they will actually manage to do the job trustees and consultants want them to. Again, there are many different costs. A lot of them are hidden in terms of individual transaction costs or switching between asset classes within a fund, which obviously will come out of the underlying price or performance of the fund, which is different than the annual management charge a manager might cost at the end of the day. It comes down to the sophistication or complication of each individual strategy in terms of what costs there will be, but ultimately to determine value on a net or fees basis you are looking to see what a manager has produced in terms of net performance.

Allan Lindsay: I agree. The opacity of the total expense ratio is quite unbelievable. The funny thing is when you mention it to asset managers they agree; they are as confused as we are because there are so many different ways of calculating it. You have to be very careful that you are comparing apples with apples because one manager’s TER is not the same as another’s, because they may have to use separate definitions.

The point Ciarán made is correct – managers should be aware of the costs they are incurring and factor that into their return expectations when they are making an investment. This normally affects an external manager because internal managers tend to be free, unless their price is more expensive than the actual diversified growth manager. It is important the managers factor in the additional costs of that investment and how it is going to affect the return profile, because otherwise they may be making an investment that is not likely to meet their expectations.

Georgina Taylor: We have had a lot of questions on that because we do invest in internal funds, so for us that does not cost anything, but technically there is nothing to stop us going external. However, it is something we said we will not do for two reasons: a) cost, and b) if you do not understand the funds you should not be investing in them. Obviously, by investing in internal funds we understand what is in the underlying portfolios in terms of exposures and the rationale and philosophy behind the positions. We can get a much better take on that by using our own Henley-based managers.

Ian Smith: What should trustees be thinking about?

Jonathan Reynolds: A lot of it depends on how much you have allocated. If it is just a satellite fund it will be there for a specific purpose. For example, I have seen quite a few schemes that need to up their bond exposure but are reluctant to do so, for obvious reasons, so they are looking for a halfway house. They are looking for something with lower volatility. Clearly, it does not have the matching properties of a bond portfolio but it gives them perhaps a slightly better return, a lower level of risk.

Smith: Is there less concern over costs?

Reynolds: No, I do not think it is hugely cost-sensitive if you understand why you are doing it. If you are going to say, ‘Right, we are going to look at all our risk assets, we are not happy with equity volatility any more; we are going to go lock, stock and barrel into diversified growth funds’, then I think it is an issue. Of course it is, because you are going to get a much larger allocation, it is going to change the whole cost profile of the scheme.

Lindsay: What we’ve found, and probably quite rightly, is trustees tend to look at costs at the end of the selection process. If they have two managers and they are both, roughly speaking, suitable and the decision is finely balanced, they may use the costs as their final decision-making process. Actually what they have are two managers that they believe are actually very similar in what they are going to provide to the scheme and, therefore, cost is the deciding factor.

Taylor: If that is the final differentiator.

Lindsay: You do often find that trustees, after going through paperwork and listening to the managers presenting, would be comfortable with appointing one or more of the managers. In such cases cost has often been the final deciding factor.

Taylor: Would transparency of information be part of that decision? Do you think that would make a difference?

Lindsay: That would be a very early part of the process.

Smith: What are the key elements of transparency?

Lindsay: Generally, it is being willing to be open with the trustees, but just as equally open with the investment consultants. It is important if a manager has a reversal for some reason that they explain why they had it, what they are going to do about it, why you should have confidence they will do well in the future. Some, in my experience, have almost said ‘trust me’, but this does not work.

Mulligan: There are different kinds of needs in terms of transparency as well from the client’s perspective. For example, the domicile of parent companies can have an effect on demands for transparency. There is a broad minimum standard that is acceptable. It can be anything from position, size, experience, performance, to explaining positions and then directionality of portfolios. Accounting, reporting and audits etc can be different for different clients. I do not want to say it is one size fits all.

Allan Lindsay is head of investment consulting, north at JLT Employee Benefits

Ciarán Mulligan is head of manager research and selection at Buck Consultants

Jonathan Reynolds is an independent trustee at Capital Cranfield Trustees

Georgina Taylor is product director, multi-asset at Invesco Perpetual