Credit Suisse move could signal FoF consolidation trend

Just three years after entering the multi-manager market, Artemis decided it wanted to focus on the core business of its direct fund range, while Credit Suisse appears content to acquire the funds.

But has the multi-manager arena become saturated with both funds and assets, and is there likely to be more consolidation in the sector? There has been a steady flow of new entrants into the multi-manager marketplace over the past five years, and now there is a choice of over 145 funds of funds, according to Standard & Poor’s.

Based on the latest available statistics for fund sizes, 60% of all funds of funds’ assets are invested in the top 20 funds. In fact, over 40% are invested in the top 10 funds. There are also a large number of portfolios with relatively small amounts of assets. The smallest 50 make up for less than 3% of the fund of funds market, having an average size of about £7m.

But this is not a phenomenon that is peculiar to multi-manager funds. Investment into direct retail funds is similarly heavily weighted to a small number of large funds. In the context of all funds domiciled in Britain, multi-manager funds still make up a small portion. According to Lipper, they account for almost 21% of funds in number, but only 10% of assets under management. Looking at funds with a minimum investment of £25,000 or less (as a proxy for retail funds), they account for 17% of all funds and 9% of total assets under management.

Bambos Hambi, head of multi-manager at Gartmore, says: “I have never seen the level of interest in multi-manager that we currently have. I believe the proportion of multi-manager assets in the market will triple in the next five to seven years.”

Hambi says there is a universe of about 5,000 funds (including offshore products) available to intermediaries, but there are about 20 multi-managers who can carry out the decision making on their behalf: “They have to consider whether or not they have the expertise to pick direct funds.”

Since Gartmore entered the multi-manager arena in 2003, both Fidelity and Schroders have launched funds, says Hambi: “They would not have done it if the market was saturated.”

“It is a natural thing for any company to look at where sales are coming from and where they are profitable. Some companies may have entered into the multi-manager arena without really understanding what it involves from a distribution perspective: a new product and brand needing different sales and marketing capabilities.”

Mark Dampier, head of research at Hargreaves Lansdown, says: “Our clients like a managed type of portfolio approach. More intermediaries are using multi-manager products for compliance reasons.”

But Dampier adds a note of caution: “How many intermediaries do real investigation into funds of funds? You can subcontract the choice, but you still need to do research into which multi-manager product best suits your clients” needs.” He suspects many intermediaries go for the the big players in the market, such as New Star, Jupiter and Credit Suisse.

Mike Watson, HSBC Asset Management head of marketing and retail distribution, says: “We think the multi-manager approach is a proposition that will increase.” He adds that using multi-manager funds speeds up advisers’ due diligence processes, and allows them to compete against the larger intermediaries.

Credit Suisse’s purchase is not the first in the multi-manager arena: Jupiter bought Lazards’ fund of funds range in 2002 after poaching its management team headed by John Chatfeild-Roberts in 2001. Insight Investment purchased Rothschild Asset Management at the end of 2002, including its multi-manager range. And New Star acquired Edinburgh Fund Managers’ multi-manager range from Aberdeen in 2003.

However, Credit Suisse’s takeover of Artemis’ funds of funds range is different in that it already runs multi-manager portfolios. None of the previous acquirers had multi-manager capabilities in place. Ian Chimes, managing director at Credit Suisse, says: “The direct funds market is pretty flat, but the multi-manager market is still growing.”

With any outsourcing arrangement, the outsourcer needs to be confident that the job will be performed professionally and will also want a value-for-money service. The provider needs to be serious about the partnership and there needs to be a strong interface between the two parties. Chimes (pictured) says some groups have posted good performance, but have not generated much money: “The relationship between multi-managers and intermediaries is key to ensure success.”

Hargreaves Lansdown”s Dampier says: “Some have benefited from a first-mover advantage, particularly those that have decided to take multi-manager seriously. Artemis didn’t really have its heart in multi-manager products, whereas Credit Suisse does.”

He says there are a large number of providers in the multi-manager arena and can”t see them all surviving: “Unless you can grow the business, more groups will consolidate. Investment performance and distribution is critical. A lot of the biggest groups have not performed.”

HSBC’s Watson says that although the multi-manager market is still growing and more fund managers are likely to launch products, there will eventually need to be some consolidation in the industry. He looks at it from a simple business perspective: “Eventually volumes will slow down and barriers to entry and break-even assessments for companies will prevent some from launching new products. The market will become more competitive and we may see performance-related fees.”

Asset houses need to ensure their product ranges are relevant to the marketplace, and rationalisation of fund ranges through mergers, acquisitions, wind-ups and rebranding is part of the evolutionary process.

The fund management industry is undoubtedly a dynamic one and asset management firms may decide to enter or exit the multi-manager market based on their capabilities and business objectives. Credit Suisse has yet to set out how it is to incorporate the Artemis funds into its multi-manager portfolios, although it has announced that it intends to continue to offer the Artemis Multi-Manager Ethical fund, the smallest in the range.

Some small firms may be swallowed up by the big players. It is interesting to note that both Hambi and Chimes rate Miton’s multi-manager outfit. Who knows what the future may bring?