Too many cooks

Author: Tom Wiseman, Managing Director, Enhance London

7Enhance_Nov-HR

How many multi-asset Investment Managers to employ in a single client portfolio is an obvious FAQ for Investment Consultants. Most people, myself included, believe that some degree of manager diversification is sensible – but at what point do too many cooks spoil the investment broth?

Assuming each manager is given a similar multi-asset class mandate, rather than a specialist role within the portfolio, my view is that far fewer managers are needed than are usually employed by clients and their advisers. Irrespective of portfolio size 2 managers is usually more than adequate, rising to 4 for particularly large or counterparty sensitive cases.

What is important is not the number of managers, but that the managers employed have different investment processes and styles. Two decent managers with contrasting styles, such as a ‘top down’ paired with ‘bottom up’ manager, should deliver similar results over the long term but with slightly different investment journeys. The net result is usually a better risk-adjusted overall return for the client.

The more managers employed, the more likely the overall portfolio is to perform in line with the peer group. There are only so many top quartile performers out there, so even the most robust research framework will fall short when trying to consistently select a large number of outperforming managers for a particular mandate.

Add to this a number of home truths about the investment industry and you have even more support for the thesis that concentrated manager selection is better:

1: Larger investments secure preferential fees
2: Higher fee paying clients enjoy better service
3: Scale provides a wider investment universe

At Enhance we prefer to work with a relatively small number of managers on each client portfolio. Through our detailed research process, we are confident we can select a small number of outperforming and differentiated managers per mandate. On request we can select more, but this is normally performance dilutive.

By working with a handful of managers on each portfolio, we can achieve better fee terms (the first barrier to performance), work more collaboratively with our chosen managers to ensure compliance with the prescribed mandate and act more decisively on manager changes when required.

Ultimately we do not feel the need to justify our existence by investing with a larger number of managers and rely on our consolidated reporting capabilities to show value. Our clients pay us to ensure that they achieve their long-term investment objectives – our aim is to do so in the most efficient way possible.

More information on how we select our managers can be found here.

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