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Performance Driven Multi-Manager Strategies

• Access to the skills of the best investment managers in the world
• Carefully structured products that balance return and risk
• Intensive research and monitoring of underlying managers
• Timely, rapid and efficient manager changes
• Transparent and accountable fee structures

We aim to identify the best investment managers in the world within specialist areas, and combine them intelligently in order to deliver superior performance within a risk controlled environment.

At the heart of our approach is the belief that no single investment manager can excel in all products. A combination of the best specialist investment managers within each asset class will therefore perform more strongly than any single "generalist" manager. However, even the very best investment managers will experience periods of underperformance. This can be because a manager's style of investing does not suit the market for a period of time, or simply because even the best can make mistakes.

WestLB Mellon Asset Management (WMAM) therefore appoints multiple investment managers within each asset class. This has the twin benefits of reducing dependence on the performance of any single manager, and diversifying across multiple investment styles in order to deliver performance more smoothly than a single manager alternative.

Manager of Managers or Fund of Funds?

The term Multi-Manager is used to describe two distinct approaches to structuring funds - manager of managers (MoM) and fund of funds (FoF). The difference is simple. The underlying investment managers employed by a MoM operate segregated accounts specifically for the Multi-Manager. With a FoF, the multi-manager invests in funds offered by third party managers.

Each approach has its advantages and disadvantages. For example, a MoM approach can increase the range of managers that can be used, because it is not restricted to investing with managers that offer suitable pooled funds. However, some (very good) managers do not offer segregated accounts, and the only way to access them is through funds. A MoM approach can be less expensive to change managers, but a FoF is often quicker. WMAM adopts a pragmatic approach, using MoM and/or FoF as appropriate for particular products. For example, our Global Equity Fund adopts a mainly MoM approach, because this is the best way to access the underlying managers. Conversely, our Global Long/Short Equity Fund adopts a FoF approach, because the best long/short fund managers often do not offer segregated services.

Investment Process

The WMAM investment process has two broad stages:

• Manager Research: Identifying the best investment managers in the world.
• Fund Construction: Combining managers intelligently to provide strong risk adjusted returns.
  

Universe

The starting point for manager research is the universe of managers offering suitable products for a particular fund. WMAM aggregates information from across a range of third party databases, spanning
institutional and retail, traditional and alternative market places. Our research has no geographic bias. For example, our European equity database includes managers from Oslo to San Francisco and our Asia database from Paris to Sydney. We continually review the universe of managers looking for those who warrant detailed evaluation.

Evaluation

There are three building blocks to our evaluation of managers:

• Descriptive information
  We collect detailed questionnaire-based information from the managers we are evaluating, covering organisational, investment and operational issues. This provides a solid basis for more detailed analysis.
• Quantitative analysis
  We employ a range of sophisticated quantitative tools to analyse historic performance and, in particular, portfolio holdings.
• Face to face meetings
  This is the most important part of our research process. It is where we gain real insight into the organisation, people and process we are researching. Our approach is meeting-intensive. Each of our fund managers are required to attend at least 250 face-to-face manager meetings per annum.

Buy List

The best managers are added to the "buy list" for a fund. Adding a manager to the buy list is a formal process, controlled by the Research Review Group (RRG). This provides a forum for group discussion,
analysis and challenge. The RRG also has a strong audit function. For example, a manager cannot be
added to the buy list unless we have conducted a detailed review of its operational systems and procedures.

Fund Construction

The buy list is the starting point for fund construction. We use sophisticated quantitative tools to analyse how effective the various possible combinations of managers would have been historically. We use the best raw material available - the historic portfolio holdings of each manager. Analysis of how managers have reacted to different market conditions within their portfolios historically can provide valuable insight into how they will behave in future. However, it is equally important to understand the limitations of quantitative analysis and be willing to back our qualitative judgement. Our objective is to construct funds that will deliver consistent performance by combining managers that invest differently from each other. Recommendations for changes to funds are made to the Investment Committee (IC). As with the RRG, the IC is a forum for audit, debate and discussion. Responsibility for hiring and firing managers within funds is the responsibility of a named fund manager.

Monitoring

Manager research and fund construction are ongoing processes. We are continuously re-evaluating our incumbent managers, how they fit together, and whether there are better alternatives. Within our long only funds, for example, we monitor portfolios at the stock level on a daily basis. This level of monitoring allows us to identify changes very quickly and act accordingly.

Changing a Manager

There are three broad reasons for changing a manager within one of our funds:

• We identify an alternative manager who is sufficiently superior to justify the cost of change.
• An event such as a key member of the relevant team leaving provides an obvious catalyst for reviewing a manager.
• The ‘fit’ between managers breaks down, and we decide to make a change to ensure effective diversification within the fund.

One of the key advantages of our multi-manager approach is the speed and relatively attractive cost with which changes to managers can be implemented within funds. We maintain a high conviction list of alternatives for every manager we employ. The assets within our MoM funds are held by a central custodian, so there is no need to liquidate the portfolio (which can be expensive) when we replace a manager. We use a transition manager to bring the portfolio into line with the incoming manager’s preferences cheaply and quickly. Whilst we can react quickly to events, our objective is to make changes before events provide an obvious catalyst. We firmly believe the key to doing this is to employ an intensive and integrated manager research and fund construction process.

Our Funds

We offer three global products, each with a distinct risk and return profile:

• The Target Return Fund is daily priced and takes advantage of the flexibility now afforded by UCITS regulations to create a true absolute return strategy. It aims to generate positive absolute returns regardless of the direction of bond or equity markets.
• The two Global Equity funds are concentrated investment strategies, aiming to generate significant levels of excess return. They are managed by the same team, and the research process is focused on uncovering truly exceptional stock pickers wherever they are based around the world.
• The Long/Short fund is aimed at investors targeting absolute returns. The Long Only fund is suitable for investors who would like to outperform the world equity market significantly over the long term and who value the fund’s objective of doing this with less absolute downside in falling markets.

Tailored Solutions

Our clients can benefit from a tailored solution to their risk/return requirements, by blending two or more of the funds we offer. Where appropriate we can wrap a client’s specific allocation to each of our pooled funds within a single unitised vehicle.

Transparent Fees

WMAM’s fees are charged separately from the managers employed by our funds. Our clients therefore benefit directly from our ability to negotiate reduced fees with the investment managers employed. Curiously, whilst this is normal within the fund of funds market, it is not within the institutional long only market, where the fees paid to the multi-manager and the underlying managers employed by a fund are usually “bundled” together. We believe this creates a conflict of interest for effective investment decision making.

Our fees have two components:

• A low base fee.
• An additional fee based on performance.

We believe this aligns our interests firmly with those of our clients. We only earn a performance-based fee for returns generated net of all underlying manager fees. Our performance based fees operate a high watermark, meaning we only receive a performance fee if it is adding to the cumulative outperformance of each client.

To find out more about WMAM’s multi-manager strategies and investment process, email:
multi-manager@wmam.com.