Pension fund trustees treat with caution the idea of splitting assets among specialists within a single portfolio, writes Caroline Madden

The concept of a multi-manager investment fund is inherently attractive. Within a single portfolio, assets are split between a number of hand-picked "best in breed" specialist fund managers from around the globe. But although multi-manager products are now available through several Irish providers, pension fund trustees are still cautious about jumping on board this relatively new investment platform.

At an investment conference run by the Irish Association of Pension Funds (IAPF) in Dublin Castle last week, two investment experts - Pramit Ghose, partner at Bloxhams, and David Hogarty, head of consultant relationships at KBC Asset Management - went head-to-head in a debate over the suitability of multi-manager funds for medium-sized pension schemes.

The central tenet of Hogarty's argument was diversification. The most successful pension funds display a high level of diversification, he said, whereas the most successful investment managers display a high level of genuine specialisation. Multi-manager funds therefore provide a method of reconciling this dichotomy.

Not only does this approach rely on multiple managers, but it also incorporates multiple strategies. Hogarty explained the significance of this "multi-strategy" aspect very simply: "You don't get a balanced diet by buying fish and chips in lots of different chip shops."

He added: "Multi-manager is by no means a panacea, but it's an easier platform for trustees to get more diversification because you're using different managers for different skills."

However, Pramit Ghose questioned whether the chain of costs caused by the layered structure of multi-manager funds is justified. Their performance to date is not compelling, he argued.

"The return from the extra cost is the same or less than if you had just bought the cheapest passive fund on the market. It's a very short timeframe to look at but they haven't delivered any extra outperformance for all the fantastic extra fund managers."

Ghose conceded that multi-manager funds were "halfway there", and had the potential to be developed into a "really good" investment product. "At the moment they're not differentiating themselves enough from the basic passive fund," he said.

He suggested multi-manager funds should incorporate "new" asset classes, such as European property, private equity, hedge funds or alternative energy.

Hogarty agreed that the multi-manager model needed some tweaking. "Multi-manager as a platform certainly has merits but . . . there needs to be a little bit more imagination brought into what's on offer. But for me that doesn't belie the underlying value of the principle.

"A really good single manager is the way to blow the lights out," he said. "The problem for trustees is that your probability of picking that manager is really low, so on balance the probabilities are more in your favour with a multi-manager type fund."

Nevertheless, he agreed that the outperformance targets of multi-manager funds have been relatively modest so far. The average return produced by Irish multi-manager funds over the last two years has been 17.7 per cent, compared with 16.8 per cent from single manager funds, according to Hogarty.

Frank O'Dwyer, chief executive of the Irish Association of Investment Managers, said pension trustees were just emerging from a turbulent few years of dealing with pension deficits and accounting standards issues. As a result, their caution in relation to relatively new strategies such as the multi-manager platform was understandable.

"They have just come out of a period of great uncertainty," he said. "They are [ now] prepared to look at a broader suite of approaches."

It is estimated that approximately 2 per cent of Irish pension assets are invested in multi-manager funds. "The level of allocation to the multi-manager type product would suggest that the pension fund trustees are taking a cautious approach," O'Dwyer said. "They're waiting for more data; they're waiting to understand charging structures."

Many of the country's leading investment managers and pension trustees attended the IAPF conference, and took part in a vote after the debate.

They were asked whether they envisioned multi-manager strategies forming part of their (or their clients') fund over the next five years.

Fifty-one per cent said they did, while 49 per cent said no, so it looks like the multi-manager debate will continue for some time.