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What’s the right number?

Thursday, June 30, 2016

What’s the right number?

Many investors can sometimes be conflicted on whether to have a single asset manager managing all their assets or expand their reach to a number of different asset managers. Indeed, both approaches are welcomed, with cases for and against, but which approach would fare better.

One of the many reasons why investors will only consider one manager to manage the entirety of their portfolio is simply because it is more convenient and easier to manage. When investors allocate assets to only one manager, due diligence needs to be carried out for just that one rather than for a number of managers. This can save time that would have been spent on researching other firms and their investment products which can in turn mean a saving of cost through less research expense.

Continuing on with the theme of cost, allocating all assets to one manager will give the asset manager more incentive to provide fee reductions and discounts. Over the long-run, any small reductions in fees will result in a substantial net positive affect on the value of your investment portfolios.

Though there are clear benefits to implementing only one manager across the whole portfolio, specifically in terms of cost, there are a number of risks that can be attributed to this approach. First of all, investors will be prone to single manager risk. Investment managers are often subjected to issues on a corporate level (substantial fines, redemptions, employee turnover etc.) and in these instances, their investment products could be severely impacted. In order to protect from this idiosyncratic manager risk, investors should allocate their assets to a number of asset managers so that any one corporate issue will have minimal impact on an overall portfolio.

Additionally, managers, more often than not, implement their investment strategies based on firm-wide house views on a number of factors whether it’s on specific asset classes, industries, countries or perhaps on wider macroeconomic issues. When this is the case, investors that invest in only one manager will inherit significant concentration risk within their portfolio because they are over exposed to a particular style of investing offered by their asset manager. When assets are spread out between different managers, there is exposure to a number of different styles and strategies which means it is very unlikely that any single event or macroeconomic shock will harm your investment portfolio due to the benefits of diversification and the reduction of concentration risk.     

What is the perhaps the most important reason to invest across a number of different asset managers is that managers often have specific asset class expertise. Some managers will focus on fixed income and their equity offerings may not be best of breed or have quality fixed income offerings but not the lacking that same level of knowledge on emerging market debt whilst some managers may focus only on niche asset classes – perhaps infrastructure, property or loans and so provide strong returns only in these areas. 

This means that when you invest with only one manger, you are not picking the ‘best of the best’ managers with the best performance in a specific universe and so portfolio performance will be undermined because it is very unlikely that one asset manager can invest and perform in every asset class as well as another. A diverse set of mangers, however, all with their own expertise allows for an optimal portfolio where there is a greater chance of maximising portfolio returns. 

As mentioned, the only real reason worth allocating all of a schemes assets to one asset manager is to reduce cost, but is this really worth it considering that returns may be hampered by a lack of expert managers or concentration risk in the long-run. As such, it is somewhat clear that investing in a number of asset managers depending on region or asset class is the best way to maximise portfolio returns.
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