Multi-Manager Diversification
A well-diversified portfolio is often overlooked
The value of a well-diversified portfolio is often overlooked in periods of market tranquility but magnified in market turmoil. In the last few months investors had the perfect environment to understand the resiliency of their investment portfolios because of this much under-appreciated investment tenet.
The benefits of a multi-manager approach
Kerr strongly emphasizes the importance of diversification across asset classes, industries and geographies when constructing portfolios, while taking advantage of the diversification benefits of a multi-manager approach. The objective of the multi-manager approach is to select investment managers with complementary styles, or that provide exposure to a specific market segment. This diversifies the portfolio across multiple investment approaches such as growth, value, and quality factors, and reduces the volatility of portfolio returns over the long-term.
Benefits are magnified when returns differ by investment style
The benefits of a multi-manager approach are magnified when there is a wide dispersion in the returns by different investment styles. In recent years strategies that favored investing in growth-oriented equities, such as technology and consumer discretionary companies, generated returns that far exceeded the returns where the focus was on under-valued stocks. Considering that the opposite was true two decades ago following the burst of the tech-bubble, it helps us appreciate the benefits of having exposure to different investment styles.
How Kerr applies the multi-manager approach
To provide insight into how we apply the multi-manager approach we highlight two global equity managers that have different styles that are part of our KFA Global Equity fund. While both managers have a unique perspective of the global equity investing universe, they have both been successful in steering investors in buoyant and turbulent markets.
The investment philosophy of the first manager centers on investing in a concentrated portfolio of companies with predictable cash flows and with the ability to generate high returns on invested capital, owning these companies over a long period of time. The process is focused on selecting companies with these attributes rather than incorporating views on economic trends. The rigorous fundamental research conducted on companies with high quality characteristics provides the team with the conviction to hold concentrated positions in a portfolio of 30-35 holdings.
In contrast, the investment philosophy of the second manager combines economic liquidity analysis with fundamental research in selecting companies with durable growth prospects. While the primary objective is on selection growth companies, there is considerable influence from the liquidity analysis on the countries and sectors that are deemed to provide the most attractive investment opportunities. The portfolio is well diversified with 65-80 holdings and it is broadly allocated across industries. Given that economic liquidity measures are constantly evolving the strategy has a higher degree of portfolio turnover and holding periods are shorter.
While both managers are seeking attractive investments in the same global universe of stocks, the factors they favor are different, resulting in distinct portfolios.
Combining managers reduces the risk
In combining managers that emphasize different factors it reduces the risk of being exposed to any one approach that is significantly under-performing. Since the addition of these two managers to our Global Equity fund over three years ago, the fund’s returns have kept pace with the MSCI All Country World Index with a lower level of volatility.
A due diligence process to identify and monitor specialty managers
To support our managing multi-manager portfolios, we maintain a thorough process to identify and monitor investment specialty managers. Our due diligence process ensures that the managers can consistently apply the approach that has made their strategy attractive, and that the combinations of best-in-class managers are meeting our investors’ objectives.
