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Neil Shillito: expelling myths around multi-manager
Neil Shillito, co-manager of the MI Downing Diversified Global Managers Fund, recently celebrated 10 years’ stewardship of the portfolio. Here he discusses what he believes are some of the myths around multi-manager investing, delegation of fund selection, enduring sector favourites and his outlook for the industry. Personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation.
1. What do you consider the biggest myth around multi-managers?
Probably that multi-manager is expensive. This stems from the fact that the overall charge is bound to be more than a single-manager fund because with a multi-manager, one has to take into account the manager’s charge for creating and managing a portfolio of funds, and the various underlying fund charges.
The principal alternative to MM is to use the services of a Discretionary Fund Manager (DFM), which many advisers do. Like a multi-manager, a DFM has to charge a fee over and above the costs associated with the underlying funds in the portfolio. So, whether one chooses a MM or DFM, overall charges will be higher. Charges will vary of course, but consumers have choice and charges should never be based upon figures alone, but on the value the investor places on the manager they choose.
2. Why do you think advisers delegate fund selection?
Another alternative to multi-manager is DIY, which can be time consuming and requires experience and skill. Without time, expertise and access to research and appropriate sources of information, there is likely to be an opportunity cost in terms of under-performance. The counter argument is that multi-managers can of course underperform, but it is a market like any other and consumers have the freedom of choice – few would select a consistently under-performing manager or fund.
The skill lies in picking funds that will perform well in a particular cycle; that do not exhibit ‘style drift’; and that have a low correlation to, yet complement, other funds in the portfolio.
3. What skills are most important when you are considering a manager for your portfolio?
We look for three core attributes in a manager. They must be: talented - demonstrating that they can typically deliver competitive consistent returns throughout a market cycle (or longer) without deviation from their chosen style; disciplined – they should have conviction in their chosen style; and aligned – they need to invest a meaningful amount of their own money in the fund and preferably also be a shareholder in the fund management company.
4. What do you consider to be your own skillset?
20 years’ experience, both as an IFA and a fund manager. I have seen managers come and go, the ‘flash in the pans’, the charlatans pretending to do one thing and actually doing another, but also the managers who have displayed real conviction and promise which later is borne out by good performance. I believe this experience, coupled with access to deep quantitative analysis, helps me make value-judgements based upon my own convictions unhindered by market noise.
5. What differentiates your fund from competitors?
We invest almost entirely in ‘boutique’ managers who meet our three core requirements. There is evidence that over time, boutiques do tend to out-perform. Most larger multi-manager funds are unable to invest in small boutique funds because their trade sizes prohibit them from doing so. Having identified funds matching our criteria we use a ‘pairing’ approach such as value/growth and large-cap/small-cap.
6. Do you have particular asset classes that you favour and have these changed in the 10 years since you launched the fund?
The fund originally had a more multi-asset approach as it formed the core of a global model portfolio. It is now principally a global equity portfolio but with a risk-adjusted bias and the inclusion of ‘alternative’ assets such as global convertible bonds, equity short strategies and insurance (up to 20% of the portfolio). We still favour global equity funds as our long-term holdings. Because companies worldwide are collectively a major component of economic growth, we believe it makes sense to invest in equity. However, we keep a close eye on volatility and downside risk and aim to reduce it, hence our exposure to other, non-correlated assets. We currently have no exposure to fixed interest.
7. Can you summarise your outlook for the industry – what are the biggest threats/opportunities?
I believe the outlook is bright and full of opportunity. The UK has a market-leading financial services industry and a consumer demographic that needs advice more than ever.
There may be relentless pressure to reduce costs and my concern is that there is a race to the bottom and a culture of ‘cheap is good’. Cheap can be appropriate but not always good. ‘Expensive’ is relative when you get value in what you pay for. My hope is that the market prevails and consumers will have choice.
Regulation is another concern and in my opinion the FCA has lost sight of its basic function - to promote best practice, accountability and protect against bad practice and fraud. Disappointingly, in many circumstances I believe regulation has also stifled innovation and prevented free choice for the consumer and the industry.
8. Any final thoughts on the future of our industry?
In the future, I believe it’s not going to be an either/or argument for ‘human’ or ‘robo’, it’s going to be the use of technology that will overtake us faster than we can envisage – so we’d be prepared for it!
Investment Manager – Downing Diversified Global Managers Fund
Important notice: this article is for information purposes, should not be regarded as investment or taxation advice and no reliance should be placed upon it. Capital is at risk. The value of investments and any income derived from may go down as well as up and investors may not get back the full amount invested. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Past performance is not a reliable indicator of future results. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Registration No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
 Source: The Boutique Premium, Affiliated Managers Group Inc. 2015