The success of the multi-manager model depends upon the skill of the asset consultant in identifying ‘superior’ specialist managers and the opportunity set within which the consultant can exercise that skill. The consultant will not get all of its manager selections right but, if it is right more often than not, the more calls it makes the higher the probability that its products will outperform.

If the consultants are skilled in making their manager selections then, in the case of single sector products, you would expect over a reasonable period that they would beat the sector benchmark and the single manager median. Incremental gains, compounded over time, should result in at least 2nd quartile performance. And, of course, the diversification in the multi-manager approach should result in relatively low risk.

So, when we look at the results for single sector multimanager products we should anticipate:

• performance consistently above benchmark;
• over longer periods, 2nd quartile performance and information ratios exceeding the median results for single managers; and
• tracking error below the median for single manager products.

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.

Twelve months ago, implemented consultants had narrowly outperformed single managers in the major growth sectors of Australian and international shares. More significantly, they achieved this result with lower risk. The story today, with our expanded universe of products, is slightly different (refer to table below).

In each asset sector, the median multi-manager product has exceeded benchmark (as has the median single manager product). In performance terms, however, the single managers are marginally ahead on points with narrow wins in Australian shares and international shares and a narrow loss in listed property.

So at the single sector level the verdict on performance is still ‘not proven’. But of course performance is only part of the story.

While the performance of the two camps is broadly similar, the significant difference is in the risk undertaken to achieve that performance – and that should be a key factor in the thinking of all trustees. The evidence shows clearly that multi-manager products have achieved their results at considerably less risk than single manager products.

We have seen that, at the single sector level, the case for multi-managers is more convincing on risk than return at this stage. In contrast, the multi-managers have clearly outperformed their single manager opposition when it comes to multi-sector growth portfolios (refer to graph below).

The margin of that outperformance by the median manager – 0.6% pa over five years – is not staggering but it is nonetheless very worthwhile, especially in a relatively low return environment. If compounded over longer periods, it can make a very big difference to longterm returns and to the eventual benefits of fund members. The fact that it has been achieved at less risk is also a telling factor.

Even now, the performance of the median multi-manager growth portfolio is within the upper quartile range for the single manager universe. It is still early days, but this appears to give some substance to the multi-managers’ case, and perhaps serves as an indicator that the cream is indeed slowly rising to the top.