Multi-Manager Products Hit $680 Billion After Record Inflows, Says Cerulli

Multi manager products including funds of funds and manager of managers products that award separate accounts to unaffiliated subadvisors enjoyed record net new inflow to finish 2003 with nearly US$680 billion in assets worldwide. Or so say consultants Cerulli Associates

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Multi-manager products-including funds of funds and manager-of managers products that award separate accounts to unaffiliated subadvisors-enjoyed record net new inflow to finish 2003 with nearly US$680 billion in assets worldwide. Or so say consultants Cerulli Associates (CA).

CA expects multimanager product assets worldwide to continue growing 14% compounded annually until at least 2008, matching the growth rate posted for the past four years.

Global Multimanager Products 2004 is CA’s third annual survey of multimanager asset management products in 10 domiciles worldwide. The report presents and explains results from CA’s most recent proprietary manager of managers survey. The 2004 study also includes a short analysis of advantages and challenges present in the global funds-of-hedge-funds marketplace, an area showing rapid asset growth.

The report also provides detailed analyses of multimanager product sales and expansion in nine key marketplaces worldwide, not only focusing on key markets during 2004-such as the United States and United Kingdom-but also on smaller, faster-growing arenas in Spain and Japan.

The key findings are that multi-manager asset management products worldwide held US$680 billion at year end 2003, up 28% from year-end 2002. Multimanager products include assets in funds of funds (FOF)-collective investment schemes that in turn invest in shares of other publicly offered collective investment schemes-and both retail and institutional manager-of- managers (MOM) products, which are funds or institutional mandates where assets are divided among multiple subadvisors. Funds of funds accounted for US$343 billion of the total, while retail manager-of-managers funds held US$220 billion, and institutional manager-of-managers products comprised US$114 billion.

Multimanager product assets maintain a four-year compound annual growth rate (CAGR) of 14%, compared to a 3% CAGR for all mutual funds during the same time frame, and 1% for all professionally managed assets. Multimanager products continue to represent one of the fastest growing subsets of the fund management industry. CA expects multimanager assets to maintain their 14% CAGR through 2008. Far from being a fad, multimanagement products continue to benefit from long-term growth catalysts present in the industry, including increased outsourcing from key fund distributors and a growing demand for advice. Growth rates will remain relatively similar between FOFs and retail manager-of-managers products, hovering around 14% compounded annually, with FOFs continuing to grow slightly faster.

Institutional MOM portfolio assets should grow at a 8.5% CAGR through 2008. Multimanager products recorded more than US$66 billion of net new business during 2003, a record amount and nearly double similar metrics posted in 2002. Most of the growth, however, remained concentrated in the United States, where lifecycle funds exploded in size, and the United Kingdom, where multimanager products in any form attracted attention during 2003. Growth among Continental European funds of funds, a traditional engine of growth, leveled off somewhat, as investors throughout the region continued to shy away from equity-objective funds. Expansion in Australia also remained cool. Interest in traditional long-only multimanagement products at least matched, if not exceeded, that in funds of hedge funds, despite the hype. Even CA’s most aggressive estimates for net new business in funds of hedge funds (FOHFs) worldwide during 2003 only amount to about US$65 billion, and the actual amount may be less, although it remains difficult to say anything decisive about opaque hedge funds. A number of sources place FOHF asset levels at around US$280 billion as of year-end 2003.

Growth rates for funds of funds and retail manager-of-managers products are beginning to converge as expected. FOF assets grew 32% year-over-year during 2003, compared to a 30% rise in retail manager-of-managers assets during the same time period. Funds of funds realized more than US$43 billion of net new business in 2003, a number that initially appears to dwarf the US$9 billion that retail MOM products realized. But net new business accounted for five-sixths of the growth in retail manager-of-managers funds, compared to representing only about half the delta in fund-of-funds asset levels. CA expects retail manager-of-managers funds to receive a growing share of new retail multimanager business, as the format permits fund sponsors to more quickly compress the costs they pay third-party managers for component product.

FOFs will remain attractive due to their simple structure and, more importantly, the tax breaks they hold. Worldwide, retail multimanagement products-funds of funds and retail manager of- managers vehicles-accounted for 15% of net new inflows into mutual funds in the domiciles for which CA tracks multimanager product growth.

Retail multimanager products now account for roughly 7% of mutual fund assets under management in these countries. Growth in the U.S. multimanager marketplace, traditionally one of the slower-growing segments of the multimanager industry, was the most dramatic measured in recent history, with U.S. multimanager products growing 44% between December 2002 and December 2003, compared to the 17% growth recordedAmong products outside the United States in the same period.