With a multi-sector portfolio, other factors come into play. For a start, the consultant has more manager decisions to make.
If we assume that a diversified fund includes, say, 4 actively managed asset sectors and an average of, say, 4 specialist managers in each sector, the consultant has 16 opportunities to demonstrate its ability to choose successful managers. Multiply that over time, and the consultant has a large opportunity set to demonstrate its skill.
If the consultant does have the ability to identify outperforming managers, it follows that its multi-manager products should themselves outperform. Over time, its results should ‘rise to the top’.
Because of the greater opportunity set available, you would expect the degree of outperformance in diversified products to exceed that in single sector products. And again, the added diversification inherent in the multimanager process should mean that those products exhibit somewhat less risk than their single manager counterparts.
Having set the theoretical scene, what are the practical realities? One is that, in the short term at least, most of the dispersion in diversified product performance is driven by asset allocation decisions, not manager selection decisions. The variability of returns between asset sectors outweighs the variability within those sectors. That makes it difficult to predict, in the short term, how multi-manager products will fare relative to single manager products.
Over the medium term (5 years plus), however, asset allocation decisions tend to even out and we should expect to see the median multi-manager outperform the median single manager. Over the long term (10 years plus), we should see significant outperformance.
The expectations for multi-manager, multi-sector products, therefore, are:
- over the medium term, performance above the median single manager;
- over the long term, performance approaching upper quartile performance for single managers; and
- volatility similar to or slightly less than single managers.