- The Washington Times - Wednesday, January 4, 2006

When you think about who is managing your mutual fund, you might imagine one person making the decisions. But portfolios are often divided among a team of people, or even split between sub-advisers with starkly different investing styles, an approach known as multimanagement.

For small investors, there can be some advantages to having your dollars divvied up among different managers, said Russ Kinnel, director of funds research at Morningstar Inc. Unlike offerings that are team managed — meaning they are run by a group of people working under the same roof — funds that use a multimanager approach seek out subadvisers with different investment strategies, styles and research, which can diversify risk and smooth out volatility.

“There are some positives to multimanagement; one is you get diversification of strategies and investments,” Mr. Kinnel said. “What you’re doing is diversifying at another meaningful level that you’d have to pick separate funds to do.”

If you invest in offerings from companies like Fidelity Investments, American Funds or T. Rowe Price, you probably haven’t run across portfolios that take this approach, because they manage most or all of their money in-house. Prominent fund providers that outsource the management of funds to subadvisers include the Vanguard Group, Masters’ Select Funds and American Beacon Advisors.

One advantage of multimanaged funds is that they often allow small investors to place their money with excellent professional managers who they might not have access to otherwise, said Wayne Wicker, chief investment officer of Vantagepoint Funds, which uses the approach. They also eliminate the risk that comes with putting all your eggs in one basket.

“When constructing multimanaged portfolios, we’re really focused on finding the best stock pickers we can in the country,” Mr. Wicker said. “But what really differentiates a multimanaged fund is to find good ones with low correlation to one another. While one manager may be lagging, the other two may be doing fine.”

Best known for its index funds, Vanguard also offers 26 actively managed equity funds, most of which are run by outside subadvisers. Of these, 11 are multimanaged, including Vanguard Windsor II, a $42 billion mid- and large-cap value portfolio run by five different subadvisers with varied approaches.

“We hire firms that manage pieces of the funds independent of one another,” said Joe Brennan, principal in Vanguard’s portfolio review group, the team that monitors external advisers. “They’re not really sharing ideas. We’re employing managers with the best ideas and approach and putting them in one fund.”

If it’s done right, the multimanager approach can help temper short-term volatility without sacrificing returns in the long run, Mr. Brennan said. The idea is to combine managers with styles that are different enough that their periods of out-performance come at different times. This way, they offset each other — one manager might be doing well while another’s style lags.

Multiple managers can also provide a way for fund companies to accommodate greater asset growth. The small-cap Vanguard Explorer fund has farmed out its $10 billion in assets to six different subadvisers. Divvying up the money makes the managers’ jobs easier and has allowed the fund to grow larger than a typical single-manager small-cap fund.

There’s a downside to this, however, Mr. Kinnel said. While Explorer has handled its growth well, and remains a Morningstar pick, the practice of adding more managers to handle asset growth can ultimately have a negative impact, because it tends to produce an indexlike portfolio.

Masters’ Select Funds tackles this problem in a clever way, Mr. Kinnel said. Ken Gregory, president of Litman/Gregory, the group’s adviser, brings in excellent managers, but asks them to run very concentrated portfolios of limited numbers of stocks. For instance, in the all-cap Masters’ Select Equity fund, six all-star advisers — including Bill Miller of Legg Mason Value and Christopher Davis of Davis NY Venture — each run a portfolio of 15 stocks or less.

“Miller has totally avoided energy and Davis has some energy,” Mr. Kinnel said. “With this variation … you’re getting the manager and strategy diversification, but you’re not getting this bloated portfolio that’s almost an index fund.”


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