In mid-2004 Sanlam Multi-Manager International (SMMI) restructured its international offering to its South African clients by applying its process to its new global equity and global bond products.
According to Justin Greeley, a fund manager at SMMI’s London office: “Instead of applying our process to regional or single country funds, we applied it to the new global equity and global bond products. What happened in mid-2004 was a restructuring of our international multi-manager product offering to South African clients.”
Previously SMMI operated on a regional basis, finding the best investment managers in each geographic area to manage its assets. “The legacy structure lent itself to effective comparisons of performance between investment managers who were running the same mandates. What the legacy structure did not lend itself to was the widest investment opportunity set — and the ability of the underlying investment managers to select the absolute best stocks in the world.
“For example, an investment manager previously running just a European mandate would perhaps have decided that the top three automotive stocks globally are Ford, BMW and Renault. However, because it was just a European mandate, they were unable to select Ford, as it is a United States-listed company, so they chose the best European automotive company, and hence BMW was selected in preference to Renault. With the new global mandate, this problem is removed and, in this example, Ford rather than BMW would be purchased,” says Greeley.
“Now they can make international comparisons, and this enables us to diversify away from country risk that comes with a single-country portÂÂfolio,” he explains.
Key to the multi-management approach, says Greeley, is understanding global markets. The change reflected not only the global trend but a deepening of SMMI’s understanding. A global equity approach allows for a much more diversified fund.
SMMI’s multi-management process is exhaustive — it is one that enables it to establish conviction in each manager selected. It starts with developing a database of investment managers in each product area, each one running to triple figures.
Following a qualitative screening process, a short-list is established, with each investment manager now interviewed and analysed, both objectively and through the quality of its own presentation.
“Where SMMI differentiates itself is that we focus heavily on understanding the investment process of the underlying investment managers: their research ideas, how they narrow their universe of stocks, their qualitative approach, portfolio construction process, risk management and trading efficiency,” says Greeley.
Only then does SMMI look at its multi-manager approach, and the blending of managers. “By combining different investment managers, risk is normally diversified away at the overall fund level. Each of the underlying investment managers that we have combined in a fund will not be running any lower risk levels.
Hence any fall in risk is achieved through diversification, not deliberate risk reduction,” he says.
The process ensures that the total portfolio is not biased to any investment style such as value or growth, as it does not want the systemic build-up of risk in the portfolio.
“Thereafter, on an ongoing basis we monitor the selected investment managers. While we do carefully monitor how the performance aggregates up in the performance of the fund (the aggregated underlying portfolios), we also very explicitly monitor the performance of each of the underlying investment managers and their own portfolio.
“The idea is to construct a robust overall portfolio capable of outperforming its index by at least 2% above any market index which is being used as a benchmark for our equity funds. For our bonds funds the targeted excess returns are usually around 1%, given the nature of that asset class,” he says.
In these particularly challenging times, SMMI monitors its investment managers even more closely.