Implemented consulting – in which asset consultants both design and implement multi-manager investment portfolios – has gained rapid acceptance in the Australian financial services market. From a standing start just over five years ago, the amount of money managed this way now stands at over $20 billion and rising.

From its origins in the wholesale superannuation arena, implemented consulting has now filtered through to the retail market as well. Individuals with as little as $1,000 to invest, not necessarily in superannuation, now have access to highly sophisticated multi-manager investment offerings – even if they don't realise it from the badge on the brochure.

While the practice has its critics, the logical appeal of implemented consulting has been widely accepted. That is, that well designed portfolios employing specialist asset managers, looked after on a day-to-day basis by full-time investment professionals, will minimise so-called ‘performance leakage’ and potentially deliver a superior outcome.

To assess whether the theory is working out in practice, we first have to define what that ‘superior outcome’ is intended to be. This is where there are some common misconceptions that need to be dispelled.

Some people’s expectations have been too high. They argue that, if asset consultants have the research skills to identify the ‘best’ managers, combine them optimally to eliminate investment style and market segment biases, and manage the arrangement efficiently, then the result should be automatic 1st quartile performance.

That expectation is unrealistic. Implemented consulting does involve all those elements, but the object of the exercise is not to achieve instant stardom in the performance tables. Rather, it is to deliver performance that is consistently competitive over the short term (i.e. above the median for single manager products), adding up to meaningful outperformance over the longer term, but all the while at lower risk than those managers. In other words, they are trying to eliminate the peaks and troughs of investment performance.

There are therefore two important measures. The first is relative return, and the second is the relative risk. That is what this survey measures. In it, we compare the performance of the implemented consulting pools (a) with their benchmark indices and (b) with the median manager (drawn from the InTech performance surveys and comprising predominantly single manager products).

On average, the implemented consultants narrowly outperformed the median single manager over the period (excess return 1.3% against 1.2%). More importantly, they did so with less than half the volatility (tracking error 1.3% against 2.7%).

For international shares, the story is much the same.

Again, the implemented consultants’ performance was slightly above the median single manager (excess return 2.4% against 2.1%) – a sound but not spectacular result.

However, the tracking error was only half that of the median single manager (tracking error 2.5% against 5%), so the performance was achieved at a considerably lower level of risk.

This is the pattern we believe trustees should be looking for when they assess the credentials of an implemented consultant – short-term returns consistently at or above the median for single managers, but at lower risk.

Over time, we would expect that incremental added value to accumulate and result in high 2nd quartile performance. In other words, a gradual rise to the top. That remains to be seen, but the evidence so far is encouraging.

In future issues we will continue to comment on the trends we identify in the survey data. In particular, we will look at asset sectors other than shares, and at the growth portfolios that account for so much of the overall superannuation picture.