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There is no magic number of managers to avoid over-diversification, according to some multi-managers.
Multi-manager investment teams are growing, with Lonsec noting in its most recent sector review that the average number of people in a team was 9.3 in 2009, up from 5.6 in 2006.
Select Asset Management’s Dominic McCormick said there was no magic number of managers that provided sufficient diversification.
“The more concentrated and granular you move down in terms of asset allocation speciality, then the more managers you need to get that degree of sufficient diversification,” he said. “If you’ve got a fully diversified index fund, you probably only need one or two managers. But the more concentrated and specialist they are, it may make sense to have more than 10 managers.”
He said if the underlying managers did things differently and well, combining them could actually bring diversification benefits.
Sean Henaghan, director of AMP Capital Investors’ multi-manager investment platform, Future Directions Funds, argued that mathematically you could not reduce the alpha of a fund if you added value through manager selection.
“You can overdiversify, but not if you manage it properly,” he said. “It only becomes a problem if you start adding managers that have a lower conviction or lower value-add.”
Mercer head of investment management in Australia and New Zealand, Gary Burke, said that adding too many underlying managers was a trap that a number of multi-managers had fallen into over the last 10 years. He said Mercer prefered to have fewer, higher conviction managers.
“In an attempt to mitigate manager risk, [you can have] too many managers that have too-broad portfolios at their disposal,” Burke said. “And when you aggregate those manager exposures, you get an index-like exposure for which you are trying to charge an active fee. We feel that doesn’t give value to investors.”
