Despite their dismal performance in parts of Europe and high expenses, multi-manager investments still appeal to fund investors seeking diversification and minimum risks, and are showing strong momentum in Asia-Pacific area, according to a latest report by research firm Cerulli Associates of Boston.
The report, Cerulli's second yearly analysis on the global demand for multi-manager funds, estimates that by the end of 2003, this type of fund will likely hold less than the $489 billion they contained at yearend 2001.
However, the overall trends long-term favoring growth in the funds, which grew 15% yearly between 1999 and 2001, "remain firmly in place."
The multi-manager product refers to assets managed by multiple subadvisors. Its two most popular brands are the manager of managers, a holding company that has affiliated investment partners, and a fund of funds, a mutual fund that itself invests in other mutual funds.
Asia-Pacific, a comparatively fledgling market for multi-manager products, shows signs of expansion in recent years and will attract growing interests from global investors, according to Cerulli.
"Historically, Asian stock markets are more volatile, and investors are suffering from bad returns recently," said Shiv Taneja, senior analyst at Cerulli. "So, they are increasingly seeking market-neutral investments." Meanwhile he points out that the assets in multi-manager funds still account for a very small part of all the fund assets in the area, compared to the U.S. and Europe.
Multi-manager funds began to take off in Asia/Pacific in 1999, when Frank Russell and Singapore's DBS Bank jointly launched the Ei8th and Horizon Investment Funds program. The funds attracted $570 million by the end of 2000.
Since then, a slew of multi-manager investment programs for the retail market have sprung up in Asia/Pacific. OCBC Bank established a MultiAdvisor program and has created a range of funds which invest in Vanguard's index funds. UOB Asset Management created a family of lifestyle funds, GrowthPath, through which the assets are invested in underlying Barclays Global Investors index funds. Skandia Global Funds recently introduced subadvised funds to the Hong Kong market, the first of their kind in the former British Colony.
Taneja said multi-manager funds started to develop in the area since the mid- 1990s. But they used to stay within the institutional level. Now they are expanding to the retail level. Another new trend is that banks, which used to focus on manufacturing their own products, are increasingly involved in distribution, and are putting others' products on their shelf. But Cerulli doesn't offer information on how such bank-sold funds are performing.
Multi-manager investment has been given the green light in more countries in the Far East. Following Hong Kong and Singapore, South Korea and Taiwan recently approved the establishment of funds of funds. British asset manager Schroders, which recently launched its multi-management services throughout Europe, is hoping to be one of the first to enter South Korea, and is also looking at Taiwan. Meanwhile, Hong Kong and Singapore both have passed retail hedge fund legislation, and approved the sale of the retail funds of hedge funds.
"Asian investors, compared to investors in Europe, are younger and more aggressive," said Taneja. "They are thinking more of building their wealth than protecting it. In Europe, there are more old things on investors' mind."
Another bright spot is Japan, which saw funds of funds continue growing last year. The amount of the funds rose to 32 in January from 12 in July 2001. The assets they held amounted to $4 billion in 2002, more than double $1.8 billion in 2001.
Japan's Employee Benefit Plans
One of the impetuses in the market is Japan's employee benefit plans. Suffering from miserable traditional equity investments and low bond yields, these plans are increasingly investing in fund of funds, including hedge fund of funds, to boost return and ease risk. Some 4%, or 1,700 Japanese pension funds, have invested in funds of funds, and another 8% are seriously considering the approach. Of the $826 million alternative investments held by Samitomo Trust, a market leader in providing services to employee benefit plans, fund of hedge funds are approaching $408 million.
Rich individuals have also become a target of multi-managers in Japan. Shinsei started selling its first fund of funds for individuals last fall, and Nikko Cordial Securities has targeted individuals.
In more developed markets, in terms of an investing clientele, the multi-manager approach has been given the cold shoulder. Fund of funds failed to expand in Europe last year. Fees perceived to be too high, as investors have to pay both levels of managers, and possible conflicts among differing managers, depressed investor appetite in Europe. Assets in fund-of-funds plummeted in the United Kingdom, which saw more than $1.07 billion in outflows during 2002. Italy lost $43 million in assets.
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