Fund Management

Multi-Manager Products Show Strong Growth—Report

Contributing Editor, 7 June 2005

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Assets in multi-manger products grew by 30 per cent during 2004 to exceed $960 billion, according to a report from Cerulli Associates, a US ...

Assets in multi-manger products grew by 30 per cent during 2004 to exceed $960 billion, according to a report from Cerulli Associates, a US financial research consultancy.

Expansion in manager-of-managers products (see definitions below) continued to outflank the growth of funds of funds, largely because regulators worldwide continue to be suspicious of the latter product and assemblers continue to shift their emphasis towards awarding separate accounts to sub-advisors.

Manager-of-managers products grew 32 per cent during 2004, compared to the 28 per cent expansion of funds of funds, with most of the activity in the latter segment coming from US lifecycle funds.

Several catalysts, including the increasing demand for embedded-advice products, as well as the increasing split between manufacturing and distribution functions in fund management, are fueling the growth of assembled investment products, according to Cerulli.

Manager-of-managers products alone received $50 billion in net new inflow, and funds of funds—even excluding funds of hedge funds, untracked in the study—received nearly $90 billion in net new business.

Cerulli expects that multi-manager vehicles will maintain their historical four-year compound annual growth rate of 16 per cent until 2009, with multi-manager products worldwide doubling in size to nearly $2 trillion before the end of the decade.

The US continues to represent the lion's share of multi-manager assets, representing more than $300 billion of manager-of-managers assets and $156 billion of fund-of-funds money. Most of the fund-of-funds assets come from lifecycle funds offered through US 401(k) plans (pension plans). About $75 billion of the manager-of-managers money derives from institutional investors.

Growth in multi-manager assets appears concentrated in a few key marketplaces. Japan's multi-manager assets swelled by 144 per cent , albeit off a small base; a much larger multi-manager marketplace, that of the UK, expanded more than 64 per cent during 2004.

The US, Australia, and Spain also watched their multi-manager assets grow faster than the global average. Much of Europe, conversely, lagged behind, suffering from anemic investor interest in equity-oriented products.

Net new inflow into manager-of-managers products soared to $50 billion, compared to $9 billion achieved in 2002. Funds of funds received another $90 billion in net new inflow, but half of that came from the US, and half of the American total came from lifecycle funds. Cerulli expects that growth in funds of funds will level off, as more assemblers become large enough to launch manager-of-managers products, and regulators begin to place further pressure on fund-of-funds' fee structures.

The market-share held by the world's five largest managers of managers—Russell Investment Group, Vanguard Group, SEI Investments, National Australia Bank and Northern Trust Global Advisors—continued to shrink below 67 per cent, down from levels exceeding 80 per cent in 2001. Rapid proliferation of assemblers worldwide has eaten into the market-share of the largest players.

Definitions
Cerulli uses the term multi-manager to describe assets invested in long-only traditional investments (i.e. no private equity or hedge funds) and held in one of two types of vehicles: manager-of-managers products or funds of funds.

The term manager-of-managers is used by Cerulli to describe vehicles managed by multiple underlying sub-advisors administering their portfolios as separate accounts. Within this analysis, MOM products are divided into two subcategories. Those structured as collective investment schemes (again, these schemes hand out mandates to their sub-advisors as separate accounts) under local regulations are retail manager-of-managers products.

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