CITI TRANSACTION SERVICES

Multi-Manager
September 2008

Welcome

Jervis Smith
Managing Director, Global Head of Managed Funds & the Middle East, Financial Institutions Group, Citi

Welcome to our multi-management edition of Spotlight, in which we hear from two leading providers of multi-manager funds - Henk van Eldik, IKANO Fund Management's Head of Fund Distribution and Frans van der Horst, Managing Director at AEGON Global Pensions.

Interestingly, each business adopts different multi-manager styles to fit their business models. However, they still have similar issues, from the need for economies of scale and transparency to the ability to make quick changes to subfunds. As a result, many multi-managers are adopting asset pooling solutions to meet these requirements.

Pooling is a valuable component to a multi-manager's armoury. Whether you are pooling the pension assets of a multinational client's subsidiaries into single pools of funds or investing the funds of one pool into another while using a third pool as an overlay to generate a market exposure; transparency, flexibility and scale are essential.

Of course, you must also have a robust infrastructure and strong research capabilities in place before you can begin to offer your clients the wide spectrum of market-leading investment solutions that a multi-manager can develop.

Taking the multi-manager step

Henk van Eldik
Head of Fund Distribution, IKANO Fund Management

The importance of capitalising on a powerful brand, together with a strong distribution franchise, has been highlighted over the past years as fund flows have favoured known performers. Many banks with weak asset management results have started to outsource even more of their funds to local experts or are now simply calling themselves multi-managers.

However, there is much more to multi-management than just outsourcing to a specialist manager. At IKANO Fund Management in Luxembourg, a business with around 4 billion Euros in funds under management, we are convinced multi-manager is the next big thing. If you look at the product lifecycle it is still in its infancy. The true multi-manager approach is only as old as the open architecture model, when banks started selling other firms' products. From the perspective of the retail investor, it has an even longer way to go.

IKANO's own multi-manager products have weathered the storm of recent events well. Our largest private investor fund is the All Seasons Fund. It has a defensive stance with only 40 per cent invested in equities, but we seek out managers who generate alpha in the various asset classes that the fund invests in. The fund targets Euribor plus 2.5 per cent. That was equivalent to seven per cent last year, but the fund actually achieved 10 per cent. When the markets blew up, very few investors even bothered to contact us.

While some investors remain wary of the dual fee structure of multi-manager products, there is a clear value argument to be made for them. By picking specialist managers for different areas and ensuring there is minimal overlap, but a lot of different styles at work, you can reduce your risk exposure while preserving performance. Additionally, in sectors such as the US smallcap it is often difficult to access some of the top-performing boutiques unless you are already invested with them since many are closed to new investors.

However, newcomers should note the costs that must be incurred. The quantitative research is straightforward, but the qualitative research needed to identify the future out-performers is elaborate and expensive: you need to do a lot of in-depth research, visiting prospective managers all over the globe. Only then can you decide whether a given manager is the right one - and will fit in with the other managers in the portfolio.

From an infrastructure perspective, it is important you have a middle and back office that not only provides you with a robust set of fund administration capabilities, but one which is versatile enough to move beyond the norm. Citi, for example, is tasked with providing IKANO with hundreds of NAV calculations on a daily basis, as well as accruals, fee calculations and other more bespoke reports at the manager- and sub-fund - level this gives IKANO the transparency that clients' demand. Moreover, Citi's pooling solution has handed us the ability to manage market exposure at the overlay level, meaning we can select new managers without making changes to sub-funds or without regard to its overall balance of investment allocations. Moreover, we can meet the investment focus of each fund.

It is clear that the multi-manager approach is only now beginning to be appreciated. The number of new entrants is rising, but they will need to prove themselves. Many view multi-manager as simply a new approach to marketing a fund, but good manager selection and portfolio construction are among the most difficult things to do. Ultimately, what counts in the end is (out)performance, against all other managers be it single or multi-manager.

Partnering for success

Frans van der Horst
Managing Director, AEGON Global Pensions

On 17 July 2008, AEGON's dedicated multimanager platform, AEGON Multi-Manager, won the Multi-Manager of the Year award at the European Pensions 2008 Awards in London - a sure sign that the role of the multi-manager and fiduciary manager are becoming increasingly entwined with the European pensions space.

AEGON Multi-Manager is an experienced and professional provider of pension and asset management services. The firm's core competence is fiduciary management, with a focus on large pension funds, but it employs a multi-manager approach combined with an asset pooling solution to achieve scale and to provide its multinational clients with the consistency of results and service they want.

Access to best-of-class asset managers

Evidence shows that no single asset manager will always be a top performer. As such, the ability to combine a range of products and services to meet the investment strategies of each investor, as well as the requirements of local regulators, is an effective way to deliver strong returns and manage portfolio risk. AEGON Multi-Manager blends the investment styles of the world's leading investment managers to fit the strategy of its multinational pension fund clients.

Moreover, it balances the risk in the portfolio and improves the chance of achieving consistent out-performance. With 14 investment managers in the Netherlands (TKP, a wholly owned subsidiary of AEGON) who are well versed in the selection of external asset managers and implementation of style rotators.

These are designed to give their overall multi-manager product a bias to the style that will work best over the coming months. The team also draws from the extensive expertise and network of the AEGON group, such as the US-based Transamerica IDEX multimanager platform.

While AEGON has scale - a must for multi-managers - it also sought tax efficiency for its investment fund structures - the holy grail for pension providers. To achieve this tax neutrality, AEGON partnered with Citi in the development of an asset pooling solution designed to channel the pension assets for each of its multinational clients' subsidiaries - all in different countries - into single pools of funds from a single platform. Previously, AEGON frequently had to duplicate structures and processes across fund classes, making expansion difficult and expensive.

Citi's solution is structured as a unique flexible service offering that facilitates asset pooling across multiple entities. Now, AEGON's equity- and bond-focused products, and its multi-manager offering, can operate through a single platform.

Tax transparent asset pooling

Now AEGON has a tax transparent means of investing the total assets for each client into its 23 multi-manager investment pools (eight of these are UCITS and can be used in several European countries), allowing its investment managers to meet their clients' strategic and risk requirements. The ability to draw on such a diverse set of building blocks, from alternatives and equities to fixed-income securities and real estate, means AEGON can capture the imagination of its investors and their advisers by offering creative investment solutions, such as:

  • Global Tactical Asset Allocation: Hedged to the euro, this high-volatility product allows clients to achieve the desired levels of risk/return with only a small allocation.
  • Global Hedge Funds: A diversified fund of hedge funds offering comprising two fund of funds.
  • Commodity exposure: Offered through a single-manager passive fund. An active multi-manager fund will be launched this year.
  • Portable Alpha Fund: Uses the results of a multi-manager portfolio as an alpha overlay in the AEGON Multi-Manager World Equity fund to minimise client fees, achieve the correct market exposure and distribute payments to performing managers.

A winner in multi-manager investment As AEGON's recent award testifies, the winners in the multi-manager investment world will be those who can build a reputation for delivering a seamless range of core and innovative investment solutions to match their clients' needs.