The world of investing has changed, says Selwyn Pillay, CEO of Sanlam Investments Multi Manager. “But we’re ahead of the curve and our business has already adapted to these changes.” This was one of the key messages Selwyn Pillay shared with Implemented Consulting clients at the first Sanlam Investments Changing Lanes Multi-Manager Forum, hosted by Sanlam Investments in Johannesburg and Cape Town during May.
The forum was established to create a space for intermediaries to focus and engage on new ways of achieving client needs and outcomes by focusing on risk management to construct portfolios.
In describing his adaption to change, Selwyn noted that multi-management used to be all about asset allocation, building blocks and manager selection to construct funds that would achieve the client’s return objectives. “The paradigm has changed. Now we select and blend risk exposures instead. It’s a subtle but important difference. We believe that you cannot manage returns, but risk is possible to manage – and through managing risk exposures we can achieve the client’s return objective,” says Selwyn.
Multi-management then and now
In the 1990s, post the years of prescribed assets, the multi-manager proposition revolved around finding the best managers in each asset class on behalf of clients. Those were the days before Google, and tracking down the smaller managers that were not part of big life insurers involved significantly more time and effort than today. The focus was on spreading the money across asset classes, markets and managers – and therefore diversifying risk in the investment portfolio.
In this phase of multi-management, a multi-manager mainly focused on understanding the asset manager’s investment process and organisation to ascertain the likelihood of continued performance. Typical manager research would interrogate the manager’s organisation and their research capabilities. They investigated the skills and experience of the investment professionals managing the funds, checked that succession planning was in place and analysed if the investment process was robust and repeatable. Often the multi-manager’s fund would include the big brands with a strong performance track record with the advantages of lower fees than the available retail options.
“But the world has changed dramatically over the past two decades,” says Selwyn. “Political and socio-economic turmoil, as well as the rise of technology, has made the investment world more complex – to the point of ‘noisy’. But on the positive side, we are starting to understand a lot of things better and can dissect managers’ DNA into finer detail than before. In addition, there are more strategies available, which is advantageous for the multi-manager. We are not confined to shares, or bonds that offer a margin of safety; we can choose from new capabilities as they emerge. These include hedge funds, smart beta, boutiques, Africa and other emerging markets, even private equity,” says Selwyn. The unique proposition of the multi-manager is the ability to have access to the next generation of investment capabilities.
What should a future-fit multi-manager look like?
In terms of creating risk-opportunity asymmetry, progressive multi-managers (multi-management 2.0) have evolved from the traditional approach of managing for returns; they now manage that which they can control – risk exposures in investment portfolios. And in doing so, the returns follow. Says Selwyn, “instead of an asset allocation and manager allocation process, we follow a multi-strategy approach, combining strategies based on risks that will be rewarded”.
How does Sanlam Investments Multi-Manager choose which managers to combine? “We research two components extensively: firstly, the manager’s style beta (or risk factor) and secondly, current market conditions (i.e. which risk factors will be rewarded or penalised), and our insights from these research processes inform how we construct solutions. Our manager allocation is therefore not static; we blend managers that will benefit from the risks that the markets are rewarding, aiming to capture more of the upside and less of the downside.Even though the focus has shifted towards risk management, multi-management 2.0 still involves blending managers to achieve the highest possible return for a universe given a level of risk. The combination of managers would, for example, look different when the market is not rewarding investors for taking.”
Even though the focus has shifted towards risk management, multi-management 2.0 still involves blending managers to achieve the highest possible return for a universe given a level of risk. The combination of managers would, for example, look different when the market is not rewarding investors for taking risk than when the market is rewarding risk. The past two years is a good example of a period that risk was not rewarded, with equity markets being volatile but mainly trending sideways. Equities and listed property delivered only 2.3% and 3.2% p.a. respectively for the two years to 30 April 2017, but cash and bond investors (low risk takers) fared better at 7.1% and 6.1% p.a.
Sanlam Investments Multi Manager’s funds are a combination of pure beta, style beta and alpha. “For style beta we choose the right managers that will give us some style beta, such as quality or momentum, and a bit of alpha,’ says Selwyn. “For alpha we have an array of boutique and traditional long only managers to choose from, as well as hedge fund strategies. These managers all have different risk factors, which gives us varying options to construct funds.”