Sebastian Mays

Institutional investor demand for an increasingly wide variety of non-traditional asset classes and sectors has driven the expansion of multi-manager alternative investment strategies, particularly within private markets. These offer diversification without the resourcing and administrative burden associated with overseeing a long list of single manager funds.

Business Development Director at bfinance, Sebastian Mays, said: “The economic landscape is uncertain and more volatile than it has been in the previous decade, with stubborn inflation and rising interest rates effecting markets globally. As a result, investors are increasingly seeking alternative asset classes that offer diversification, downside protection, upside capture or low correlation to traditional assets as a way of navigating turbulent markets.”

Major industry trends have facilitated the evolution of the multi-manager sector. These have included: investor diversification across an increasingly broad and deep landscape of alternative investment strategy types; a changing investor base for alternative investment strategies with newer entrants including institutional (DC pension) and non-institutional (wealth) clients; a major wave of asset manager M&A activity that has seen asset management firms buying up numerous alternative investment boutiques or teams; and the pivot of investment consultancy towards (more lucrative) fund management activities, wherein multi-manager alternative investment strategies have proved to be a major area of focus.

Four headline changes of note include: a move from commingled funds to highly customised partnership-style strategies, the emergence of ‘multi-asset private markets’ offerings from 2017 onwards, the advance of (what this paper terms) in-house fund of funds and a very different landscape of providers that features alternative and traditional investment managers, investment consultants and tech-enabled aggregators.

Benefits of multi-manager investing

Multi-manager strategies are less resource-intensive for the investor, allowing for diversification across multiple drivers of return. They can also potentially offer higher liquidity in typically illiquid sectors, depending on the strategy, and may offer a reduction in the ‘J-curve’ effect in private markets.

Challenges of multi-manager investing

Key challenges include conflicts of interest with more layers of separation between clients and assets, increased complexity, potentially high fees (depending on the approach), and low visibility on many parts of the manager universe.

The paper proposes and defines four major categories of multi-manager strategy, which can be presented on a spectrum from those that are more ‘product-focused’ to the more ‘solution-focused’ offerings. Some of these, such as the ‘internal fund of funds’, are not pitched outwardly as multi-manager strategies but should—the authors argue—be considered as part of this family.

Single Asset Class FoF

This model is favoured by asset class specialists in private markets. These vehicles typically provide access to external managers and have especially strong appeal in asset classes where even well-resourced investors would typically find it difficult to develop appropriately diversified single-manager portfolios, such as Venture Capital. Single Asset Class FoFs typically require a double layer of fees and low liquidity.

Internal FoF

These umbrella structures represent a way of packaging multiple in-house strategies in a single product. Such funds may also feature co-investments and secondaries and tend to be less diversified than fund of funds that use external managers. Within private markets, many Internal FoF are focused on a single asset class, overlapping with Single Asset Class FOFs, while others cover multiple asset classes—helped by the wave of M&A activity that has seen asset management firms adding multiple alternative investment capabilities. Within the hedge fund space, internal FoFs are more commonly known as ‘multi-strategy’ hedge funds – now the second most popular hedge fund strategy type and the subject of a separate new report from bfinance following a period of outstanding performance and popularity.

Diversified FoF

Portfolios in this group are diversified across multiple asset classes and sectors, with strategic and tactical asset allocation/risk budgeting determining the fund’s exposures. In liquid alternatives, these conventional fund of hedge fund strategies offer exposure across multiple hedge fund styles, while in private markets the period from 2017 onwards has seen the rise of truly diversified FoFs that combine real assets, credit and equity into a single offering. While this strategy offers good diversification across asset classes and styles, it is very complex.

Customised FoF

The most solution-focused, Customised FoFs are diversified strategies offering a high degree of partnership with a specific investor. These use an open architecture approach to give the investor access to a broad variety of underlying strategies with strong support on asset allocation, tactical repositioning, cashflow management and more. Products are very complex and a high degree of knowledge transfer should be required. This model primarily refers to strategies that span multiple asset classes, and can be expensive, particularly for those that make greater use of direct investments.

Kathryn Saklatvala, Head of Investment Content at bfinance, said: “The landscape of multi-manager alternative investment offerings available has evolved dramatically, giving investors new choices, though it can be challenging to assess and compare these complex strategies. We hope that this report provides a helpful framework with which to think about types of multi-manager strategy and their applications. More broadly, as a matter of good governance, investors may wish to consider an appropriate frequency for re-evaluating and re-underwriting their operating model for investment outsourcing across the whole portfolio, including the number and type of asset manager relationships and the appropriateness of direct versus fund versus multi-manager investing. Conclusions of these reviews may—and probably should—change as both the investor and the industry/products evolve.”

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Sebastian Mays

Independent investment consultancy bfinance has released its biennial global asset owner survey. With 2022 proving to be a year of major market and macroeconomic upheaval, the survey queried 396 senior investors, whose institutions are responsible for more than $13 trillion in assets, based in 40 countries, to see how they have fared and what they expect for the future.

Sebastian Mays, Business Development Director at bfinance, said: “For Australian investors, there is strong level of satisfaction towards private market strategies and their performance. Particularly for institutional investors, the low volatility of private assets can be extremely important both from an asset allocation viewpoint but also from a Your Future Your Super benchmark point of view.”

“Another interesting difference between Australia and global peers within the survey is the underweighting towards risk assets.”’ Mr Mays said. During the current period 52% of Australian investors are currently underweight risk assets, compared to 28% of their global peers.”

Asset owner performance

In 2022, only 56% of investors are “very” or “quite” satisfied with their overall performance so far, compared to 82% in Summer 2020. However, most do not appear to be laying the blame at the door of their strategy (e.g., their strategic asset allocation): 82% are satisfied with performance there. Meanwhile, 63% are satisfied with the performance of their Active Managers with frustration particularly evident in equities (particularly Emerging Market Equities) and Emerging Market Debt.

Investment portfolios

The trend towards private markets in asset allocation remains in force, with 52% of investors expecting exposures to increase over the next 18 months. Some 28% expect to cut exposure to equities and there is a very modest positive ‘swing’ in favour of fixed income, driven both by higher interest rates and by investor de-risking. Hedge funds see no swing, despite the exceptional performance of CTAs and global macro strategies through recent turbulence, but there is an expected positive sentiment for certain hedge fund sectors as investors consider their long-term strategic diversification.

In terms of macro concerns, 87% of respondents were concerned that inflation and rising rates will impair their ability to achieve investment objectives. That being said, only 43% of investors have recently made and/or are about to make changes that increase the inflation-sensitivity of the portfolio, and just 17% expect to do so in the coming 18 months, as fears of recession loom large.

Improvements in funded status and higher interest rates are supporting a modest trend towards liability-driven investing (LDI). Nearly half of investor respondents (46%) indicated that liability-driven investing was relevant to them. Within this group, 19% of investors said that they are moving further towards LDI-type approaches, versus 3% that are moving away.

Additionally, 20% of investors are predicted to shift towards active management in the next 18 months, compared to 14% moving towards passive investment. This follows 16% of investors saying that they have moved towards active management in the last 18 months, versus 13% who have moved towards passive investment – a massive contrast to 2018, where 31% of investors were shifting towards passive investment. The movement in favour of active management is most evident among insurers and endowments/foundations. Wealth managers, conversely, are trending towards passive as they seek to compete with peers on cost while simultaneously adding alternative strategies.

Additionally, only 8% of investors currently have exposure to cryptocurrencies, but this is set to rise to 21% in five years’ time. The responses differ substantially by region: 57% of US investors expect to have some exposure in five years’ time versus just 11% of those in the UK.

Illiquidity

Overall, 33% of respondents said they expect their portfolios to become less liquid over the next 18 months, versus just 12% who expect it to become more liquid. The results for insurers and endowments/foundations are even stronger (41% and 42% respectively). Illiquidity is not just a function of exposure to strategies with a lengthy formal lock-up period: equity and fixed income investments have varying and variable liquidity profiles.

To what extent are investors affected by the ‘denominator effect’, where large declines in public markets mean that private markets (which are slower to experience a downward adjustment) appear to be over-weighted in the portfolio? Some 49% say that they can “wait as long as it takes” for the dislocation between public and private strategies to unwind. The most patient cohorts were family offices and endowment / foundation / SWF investors: three in four family offices say that there is “no pressure to rebalance at all”. The other half of the investor respondents experience pressure to rebalance when there are large dislocations in public markets, either imminently (19%) or within a few quarters (32%).

It is interesting to note investors’ varying expectations around the illiquidity premium. Three quarters of the investors who use Private Equity expect it to outperform public equities in 2022 – even after correcting for measurement errors such as delayed mark-downs. Insurers appear the most confident on this point: 98% expect outperformance, though many of this cohort are relatively recent entrants to the asset class. Looking beyond 2022, the true value of private equity positions will depend heavily on investor sentiment.

ESG

ESG-related practices, including newer themes including carbon reductions and impact investing, are still on the rise. A quarter of investors are now engaged in ‘impact investing’, with a further third planning on doing so. When it comes to carbon, 32% of investors are reducing portfolio carbon emissions/intensity.

When appointing managers, investors take ESG credibility increasingly seriously, with a growing emphasis on climate and carbon. One third of respondents would now be “unlikely” to hire a manager who has not made a Net Zero commitment. Beyond the climate topic, US respondents and Family Offices are considerably more active on the subject of gender and ethnic diversity than on climate-related aspects.

Resourcing

The 2018 study evidenced a trend towards improved efficiency, with investors pushing investment costs down — even while adding complexity and alternative asset classes. The past three years, however, show no evidence that the cost-reducing trend has continued. Asset manager fees have been declining, particularly in equities and fixed income: 54% of investors say that fees for ‘like-for-like’ strategies in public equity have fallen in the past three years. Yet the report also notes a shift towards outsourcing a greater proportion of assets to external asset managers—30% have moved in this direction in the past three years. The ‘outsourcing’ trend replaces a previous (modest) trend towards manging a greater proportion of assets in-house.

Despite the rising use of external management, asset owners’ in-house teams continue to become larger and more sophisticated: 48% of investors have increased the number of investment staff in their in-house team during the last three years. This represents the continuation of a crucial trend towards improving capability: portfolios have become more complex and today’s investment climate is increasingly challenging.

Finally, with costs under scrutiny, the report finds that 21% of investors are now happy to conduct ‘virtual’ due diligence for all external managers, including new relationships – saving on travel and related costs. Smaller investors are happier than their larger counterparts to conduct virtual due diligence in all cases.

Kathryn Saklatvala, Head of Investment Content at bfinance, said: “This has been a fascinating juncture at which to carry out this biennial study. There is now no doubt that we are in a period of secular macroeconomic transition. Institutional investors are evidently concerned about inflation and rising rates, but the looming threat of recession and the steep decline in public markets this year makes the prospective choices very difficult indeed. The investment strategies that may provide the greatest resilience in a climate of inflation and rising rates may also be more vulnerable in a climate of recession and higher defaults, and vice versa. Private markets have initially appeared to provide more resilience, and investors are continuing the long-term trend to increase exposure to illiquid strategies, but complacency should be avoided at all costs. Investors must now navigate these ‘traps’ with care.”

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Sebastian Mays

Specialist global investment consulting firm, bfinance, has strengthened their presence in Australia with the appointment of Sebastian Mays to the newly created role of Business Development Director. This new position has been created to facilitate and drive the ongoing expansion of bfinance’s business in Australia.

Mr Mays has 8 years of experience in the investment management industry and holds both a Bachelor of Arts from Monash University and a Certificate of Applied Finance from Macquarie University. He started with bfinance officially on 14 June, 2022.

Prior to joining bfinance, he began his career at Shed Enterprises, a placement agent specialising in asset management capital raising. During this time, he held numerous positions including Investment Specialist and Business Development Manager.

Mr Mays will drive the development of bfinance’s growing suite of solutions including fee benchmarking, operational risk management and ESG analysis.

“I am excited to join the bfinance team and I look forward to furthering their growth within the Australian market,” Mr Mays said.

“Given the difficulty of asset allocation in our current market environment, asset owners will be looking for specialty knowledge and insights from their consultants. I strongly believe that close relationships and a dynamic knowledge of client portfolios is critical in managing individual portfolios and I look forward to furthering bfinance’s strong focus on this.”

Senior Director Client Consulting at bfinance, Frithjof van Zyp, said Mr Mays will play a pivotal role in the growth of bfinance and will incorporate his expertise within the wealth management sector.

“It was my pleasure to welcome Sebastian to the bfinance team earlier this month. His positive attitude, coupled with his experience in engaging both institutional and wholesale investors across multiple asset classes, will allow us to continue delivering bespoke solutions across Australia’s growing market of asset owners,” Mr van Zyp said.

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