Cerullli’s recent Quantative Update found that assets in multimanager products, a segment that includes both funds of funds and managers-of-managers vehicles, expanded by 40 percent during 2005 to exceed USD1.3 trillion.
Global Multimanager Products 2006, assembled by Cerulli’s international is the most recent addition to the firm’s ongoing research in assembled products. This year’s report includes findings from a broad survey of the world’s largest managers-of-managers, and now covers 12 asset management marketplaces.
Managers-of-managers assets grew by 31 percent to USD667 billion. However, this rapid growth was outstripped by funds of funds, which grew by 51 percent to USD665 billion. Cerulli believes that higher funds of funds growth was due in part due to the growth of those products in markets where recently-enacted regulations fostered these products. Another major factor is that global growth rates for funds of funds and manager-of-managers were driven in large part by similar results in the United States, the largest multimanager marketplace.
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. Manager-of-managers products alone garnered USD62 billion in net new inflow, and funds of funds received nearly USD147 billion in net new business. Fund of funds growth in the US is driven in large part by the success of lifecycle funds, which offer embedded advice in an easy to use package. Cerulli expects that multimanager vehicles will maintain their fiveyear compound annual growth rate of 16 percent until 2010, with multimanager products worldwide doubling in size to more than USD2.8 trillion before the end of the decade.
Reversing last year’s performance, funds of funds’ asset growth outpaced managers-of managers by 20 percent, with the two segments growing assets at 51 percent and 31 percent respectively. This is due in large part to the continued success of funds of funds in the US, the largest market for multimanager vehicles. Funds of funds are increasingly popular, particularly in lifestyle and target retirement wrappers.
Funds of funds (FOF) made up the fastest growing multimanager product segment. The pace of lifecycle funds stateside made up a huge component of this growth. FOF are easy to setup, particularly in financial centers such as Dublin and Luxembourg. Such arrangements allow the assembler to effectively “purchase” an asset manager’s existing portfolio, as opposed to a managers-of-managers (MOM) arrangement, where the assembler effectively “hires” the manufacturer as a subadvisory. Whereas the MOM arrangement requires contractual agreements between the two parties, the FOF arrangement is fluid and undocumented, assemblers may “sell” underlying managers and invest the proceeds into another manager’s collective scheme. FOF also provide some tax advantages, particularly in Europe.
Though typically excluded from the bulk of our analysis, funds of hedge funds (FOHF) do hold nearly USD500 billion in assets worldwide. This market is large enough that Cerulli added a chapter dedicated to FOHF. Nonetheless, FOHF have become the slowest growing segment of the multimanager market. Inflows have slowed dramatically, as returns have not significantly outpaced the cost of ownership. Meanwhile, some institutional investors, after having initially chosen FOHFs as the cautious route, have now turned to direct hedge fund investing, either on their own, or with the assistance of a consultant. Whether or not this slow down in FOHFs is a boon for multimanager or for direct hedge fund investing is up for debate, these two product sponsors do not often directly compete for the same clients.
Multimanager products represent fine opportunities for third-party asset managers, as these solutions increasingly are becoming unfettered. For example, outside the US 47 percent of fund of funds assets are unfettered. This percentage has been rising steadily, up from just 34 percent in 2001.
Cerulli uses the term multimanager to describe assets invested in long-only traditional investments and held in one of two types of vehicles: manager-of-managers products or funds of funds.
Cerulli uses the term manager-of-managers (MOM) products to describe vehicles managed by multiple underlying subadvisors administering their portfolios as separate mandates. Within this analysis, MOM products are divided into two subcategories. Those structured as collective investment schemes (again, these schemes hand out mandates to their subadvisors as separate accounts) under local regulations are retail manager-of-managers products. Cerulli admits that institutions may purchase these products as well, but data opacity prevents our analysts from dividing retail and corporate flows within these collective schemes. Most other manager-of-managers vehicles are tailor-constructed for institutional investors, and Cerulli categorises the remainder of MOM vehicles as institutional manager-of-managers products.
Cerulli uses the term funds of funds (FOFs) to describe collective investment schemes that in turn invest in shares of other publicly offered collective investment schemes. They refer to a fund of funds investing purely or almost exclusively in proprietary subfunds as fettered; funds of funds investing mostly in nonproprietary subfunds are classified as unfettered.
Cerulli uses the term retail multimanager products to refer to funds of funds and retail manager-of-managers products collectively.