[Estimated time to read: 8 minutes]
The Nedgroup Investments Growth MultiFund is one of the most popular funds with our clients, intended to provide consistent returns over the longer term.
In part one of a two part series, we talk to managers Andrew Yeadon and Simon Watts about how they select funds for the portfolio, their use of active and passive investment strategies and the potential benefits of multi-manager investing.
Andrew and Simon, Nedgroup Investments manages three funds that feature on the AES International White List of recommended funds – Nedgroup Investments Growth, Balanced and Income MultiFunds. We are focusing here on the Growth MultiFund. Can you please briefly explain its objective and what sort of investor it may be suitable for?
As you’ve implied, Nedgroup Investments Growth MultiFund is part of a range of three risk-profiled international multi-asset portfolios.
Of the three, the Growth MultiFund is managed with the greatest tolerance for volatility, with the expectation that it will deliver the highest returns over time. Given these characteristics, it appeals to more adventurous investors, who are likely to have a longer time horizon, and be more willing to accept the bumpier ride that inevitably comes with a portfolio that has a bigger commitment to the more volatile asset classes.
What is the starting point of the investment process? Where do you get your investment ideas?
All our funds have a strategic framework and asset allocation ranges that define their basic structure. For the Growth MultiFund, this means that the equity weighting will normally sit between 40 to 100 percent, with bonds at zero to 40, property at zero to 20, alternatives at zero to 30 and cash taking up the balance.
Accepting those basic criteria as a starting point, there are three key areas we focus our investment effort on – tactical asset allocation, manager selection and portfolio construction/risk management.
Tactical asset allocation is driven by our monthly International Strategy Committee, which involves all the best investment thinkers from across both Nedgroup Investments and Nedbank Private Wealth.
The research, data and charts are prepared in advance by our team in London, and the Committee bases its discussions on this and any other relevant evidence that participants bring to the table. Through this process, the Committee sets and adjusts the broad guidelines within which all our portfolios are managed. As well as considering the “top down” perspective, we also consider the insights we get from our many meetings with third party fund managers, and it is often the case that the best ideas are those that are supported from both perspectives.
Manager selection is carried out by our research team in London, which conducts quantitative screens and on-site qualitative research on a large number of potential managers. Over the course of the year, our analysts conduct hundreds of meetings as we keep up-to-date with our existing managers, and seek any new ones that can tick our boxes.
Our portfolio construction and risk management efforts have a variety of layers. If we set aside all the independent compliance monitoring and just focus on investor risk, we have a number of tools that help us understand and regulate the risks we are taking. In order to qualify for an investment from us, all managers are required to supply us with the data we need to plug into our risk systems so that we can fully understand the characteristics of their portfolios, and also those of our aggregated portfolios. This is critical, because we place an emphasis on making sure that we take enough risk to achieve our clients’ goals, while also having a good spread of risks, so as to avoid any unwanted concentrations.
One final point that I would highlight is our experience and the contacts we have built up over the years. We have lots of meetings with brokers and promoters, and whilst we take much of what they say with a pinch of salt, sometimes they bring us a great idea, and I like to think that when that happens we have the experience to recognise it.
To achieve its objective, the fund invests in a combination of active and passive management strategies. Once you have decided on an investment idea, how do you decide whether to use an active or passive approach?
We think a combination of very high conviction funds with low cost passives gives us the best balance between potential return and costs. On deciding when to be active and when to be passive, we assess whether, historically, active management has been rewarding enough to justify the higher fees. If the answer is no, we will choose a passive fund.
For instance, one area where we have never been convinced of the active industry’s ability to add value is property securities. That might be surprising, but the historic underperformance of the majority of managers in this area was very striking when we reviewed the evidence. As a result, we have generally used low cost iShares to gain exposure to global real estate investment trusts (property equity) over the past few years.
When you are selecting a fund, how deep is your analysis? Will you go through the underlying holdings within a fund, or are you happy to trust the stock picking ability of the fund manager you have chosen, if it is an actively managed fund?
It’s such an important part of what we do, and we spend more time on this than on any other area. When we review a fund, we don’t get into second guessing individual stock selections, but we do sometimes pick on holdings and ask managers to explain their rationales. When we do that, it is more with a view to getting a feel for how they think and behave.
Nowadays all managers respect our demands for security level holdings data, and we put this data through a system called Style Research which creates reports that help us to understand a portfolio’s characteristics, and how it might behave in different market conditions. This is a really useful exercise as it allows us to test how aware a manager is of their risks, and also to establish whether or not what they say about their approach holds up to scrutiny.
Almost without exception, all fund managers have well-polished presentations, but it’s our job to differentiate between reality and spin.
As well as looking at holdings data, we also examine each manager’s historic return patterns, because they all have certain biases that often recur through time. For instance, some will tend to do better in bull markets, whilst others might shine when markets are under pressure. Similarly, some managers show greater consistency through time, whilst others might be better described as “one hit wonders”.
Other examples of things we can usually detect are persistent biases towards or away from small caps, cyclicals, value, momentum and quality. But it’s important also to stress that it’s not all about numbers, and our research process will also consider less quantifiable factors, such as product capacity, alignment of interest, quality of support, stability of firm, incentives and remuneration structures etc.
If passive funds are more cost effective – why do you not use them in all markets you want to invest?
The only thing that matters to us is our assessment of potential returns after costs. Being completely agnostic on the passive versus active debate, we think both have a role to play in any portfolio.
What we really don’t like are closet index tracking “active” funds. Our view is that if a fund purports to be active, it should pursue this approach with focus and conviction. Therefore, when we choose an active fund, we favour high tracking error products.
Since we run relatively concentrated portfolios ourselves, we sometimes use an element of passive to achieve our own overall target tracking error. Of course this approach also allows us to be cost competitive, which only serves to benefit our end clients.
What is the benefit of using a multi-manager approach when compared with a single manager, active fund? Is it not cheaper to use a single manager fund?
It is true that single manager funds typically have lower total expense ratios than multi-manager funds. Aware that costs matter, we have made a point of setting our headline fees at lower levels than the industry norms, and also making sure that we get our clients the best deals possible from the underlying managers. Add to that our selective use of low cost passives and we are able to deliver the benefits of a multi-manager approach at a very competitive cost to the end client.
The advantages of multi-manager versus a single manager approach are quite clear.
The main point to recognise is that we provide a total multi-asset portfolio solution which is diversified across the best specialist managers in the industry. As well as regular equities and bonds, we are also investing in a lot of specialist asset classes, such as high yield debt, emerging market bonds, commercial property and renewable energy.
Since it is impossible for any single asset manager to ever be the best in all these areas, the multi-manager has the advantage of being able to look across the whole industry and pick the leaders in each category, without the constraints inherent in a single manager approach.
A second point is that the freedom we have means that we can respond to change much more readily than a manager who is restricted to just using in-house capabilities. If something detrimental happens, like for instance, the investment team leaves, we are free to move the money to our first reserve manager, or, if it makes sense, to follow the investment team to their next firm.
Look out for part two next week where we delve into the current portfolio in detail...
