Be wary of multi-manager funds

Are five (or more) minds better than one? Or do too many cooks spoil the broth?

That’s the question you need to ask when you’re consider whether to invest in a multi-manager mutual fund, which some companies seem to think is one of the greatest ideas to come along in years.

Take Mackenzie Financial, for example. It recently added a new fund grouping to its already bloated line-up, called Select Managers. This brand brings together several previously-existing funds along with some relative newcomers. The common denominator is that all use a multi-manager approach, with sometimes as many as 10 individuals involved in the stock-selection process.

Most mutual funds have one lead manager who brings his or her distinctive approach to the securities selection process. In the case of team-managed funds, all the members usually share a similar investment philosophy.

But multi-manager funds like those in the Select Managers line-up go at it another way. The managers are deliberately chosen in such a way that each brings a different style to the table. The fund is then carved into small chunks and each manager is responsible for his/her own segment.

This cabe good or bad, depending on how you look at it. The positive spin is that the multi-manager approach combines the top picks from some of the world’s leading money managers with style diversification and specific areas of expertise. The negative view is that the end result is a patchwork portfolio that lacks any clear direction or investment philosophy.

Results so far are mixed, so it is impossible to drawn broad conclusions as to the effectiveness of the multi-manager approach. There are nine distinct funds in the Three Select Managers group. Of these, eight have three-year performance records. Three of those (Far East, International, and Japan) turned in above-average results over that period. The other five underperformed their respective categories.

Mackenzie’s first multi-manager fund was the Mackenzie Select Managers Fund which was launched in the fall of 1998. It was promoted as a “best ideas” fund with several Mackenzie managers contributing their favourite stocks to the mix. Initially, it was a big success. The fund gained more than 58 per cent in 1999, drawing a lot of attention and investor dollars. But in the slump of 2000-02, it looked terrible and soured both investors and advisors. The loss in 2000 was 24.4 per cent, in 2001 it was 11.7 per cent, and in 2003 it was 25 per cent. Clearly, the multi-manager approach offered no defense against big losses in poor markets. The fund has looked better lately, however, with a one-year advance of almost 38 per cent to March 31, above average for the Global Equity category. But the lack of consistency is a real concern and raises serious questions about the viability of this approach over time.

Shorter-term returns for the other Select Managers funds and Capital Class units are also generally good, with five of the remaining eight showing above-average one-year gains. But that was during a period when markets were strong. Their staying power still remains to be tested.

My personal preference is for funds that have a single manager (or a small team) and that display a clearly-defined approach to securities selection. So think carefully before you opt for a multi-manager approach. Unless the fund has a consistent record of success over at least five years, you should probably consider other options.

Adapted from an article that originally appeared in Mutual Funds Update