 Hey guys, it's nj the students actually and in this video. I want to talk about multi manager madness Now in your textbook when it comes around, you know, the multi manager You'll normally see the benefit is that they increase diversification and the disadvantage is that they add another layer to the cost What I'm gonna be doing in this video is I'm gonna be going a lot deeper into this problem So what I've got is a little a little diagram. Let me try to get this diagram sorted Okay, so we have our little pension fund and Normally the pension fund comes in it either puts its money with fund a or puts its money with fund B But there is something else known as a fund of funds And this is a fund that invests in other funds another word for a multi manager Now what is really interesting about the fund of fund is that it's kind of like playing tennis on both sides of the court Because what they're gonna be trying to do is they're gonna be trying to take The money from the pension fund They're gonna be trying to get the assets in which case they are competing Against the other funds because all the funds are fighting for the investments But if they win they're then going to be investing in these other funds here So it's a little bit weird because on the one hand They're competing against these funds and on the other hand they're investing into these funds So they're both competitor and client to the other funds which is A little bit weird Okay, but now what we need to know about the funds of funds Especially when the investment consultant comes and talks to the pension fund is that the fund of funds it's this whole idea of active investing and I think I'll make more videos explaining why active investing Isn't as great as it's made out to be there's this other thing known as passive investing where you Invest fire an index and a lot of evidence is backing up that that's the better way to go However, a fund of fund is very much still in the belief or the philosophy of active management Remember their their belief is that we can identify tomorrow's winners with consistency So they need to believe that these funds can outperform and that they can choose which one's gonna do better Which like I said, oops, sorry It's not the best thing because there is a lot of evidence supporting index funds at the moment But anyway, let's move on one of the the big disadvantages or one of the big problems with fund of funds is that they can release multiple portfolios and This gets a little bit difficult to detect whether they're doing it maliciously because they could be saying each pension fund could Be giving them a specialist mandate which requires them to create another fund or what they do is They might just create for every pension fund a different fund regardless And then what they do is over time the funds that do well They highlight and say oh look how great we did with these and the funds that didn't do too well They either ignore them or they close them and they transfer the other pension funds into the winning funds And it's a little bit. Yeah, it's a little bit sneaky sneaky But what they can then do with that is they can then have marketing literature saying look how well our one funded Meanwhile, they had ten funds only one beat the market and then they're like, oh look how great we are So that is something that a pension fund needs to be aware of and an investment consultant should be telling the pension fund The problem though is that there's a little bit of a conflict of interest because sometimes the investment consultant works for a company or underneath a Corporate entity that also owns a fund of fun and also owns these funds over here Which means all three of these guys are working for the same corporate entity Which kind of breaks down the whole integrity and the whole independence and This conflict of interest, you know what it does it affects the distribution of their products and it affects the mix of their underlying assets and Because yeah, like I said, there's this is this inappropriate Incentives or pressures to to invest in the same corporate entity because you want the business under the same brand So that you can make more money Also a big problem with these fund-to-funds is the way the fees are done So fees are still based on assets under management, which I mean There's a whole philosophy why it shouldn't be like that because then it means asset managers main goal is not to outperform the market But to just get more and more assets under their care And you can see a lot of asset managers love to brag about this They say oh, I'm this asset manager and I have seven hundred billion under management or I'm Joe Smith And I have two hundred billion under under management very rarely do they say oh, I'm Joe Smith And I've got a sortino ratio of four or you know, I'm this asset manager and my risk return adjusted Performance is you know, that's the more important thing But they very typically quote the amount of assets they have under management because that's how their fees are related But now what normally happens with normal funds is that there's like a 2% fee and then there is a Performance fee if you beat the benchmark, which is this guy over here We will take 10% or 20% of the amount above it However, when it comes to fund-to-funds what they sometimes do is they share in the performance fee So let's say fund B does very well and fun that does very badly In this fund the fund-to-fund gets some of the performance incentive from fund B It's nothing from fund a but even though overall the fund-to-fund hasn't beaten the index fund They're still getting a performance fee from this fee over here. So that's also a little bit dodgy They can also generate hidden forms of revenue Fund-to-fund could come here and say the pension fund. Hey, we will supply your administrative system Pension funds like okay. That's pretty cool. You know less less complexity But then the charge for the administrative fee is or the administration system is going to be based on assets under management and A wise investment consultant would say no don't do that rather go with a normal administrative company Where you paying a fixed fee because you're gonna be way overpaying to this fund or fund Okay, so that is That's a little bit crazy But essentially what you're doing by going to a fund-to-fund is you're paying for manager selection But it does get a little bit complicated because there is now another party in the value chain I mean, I'm really cut out if you see from one of my last videos You know how deep this chain actually goes and that was a very simplified version of it so What we need to or what what pension funds need to to realize is that by going to a fund-to-fund It might make manager selection simpler, but they still have that fiduciary Responsibility that if the money is you know mismanaged. It's still their problem for the trustees But now what pension funds should do when they come to find the funds is ask them various questions They should ask them How are managers identified? So, you know, is this manager better than that manager and how do they consider when various likely say analysts Some really hot shot analysts works for fund a makes them a lot of money and then he moves to fund B You know, how do funder funds take that into consideration that key personnel are moving between managers? Also, if they get given a hundred million How do they allocate, you know, and they're gonna go with fund and fund B. How do they allocate that weighting? Is it equally weighted or how do they how do they do that? Also, how many hours a year are they spent on the due diligence of each manager? Remember that that's probably the biggest advantage of the funder funds is that the pension fund or the investment consultant only needs to consider One fund and say, okay, these guys are legit And then the funder fund is supposed to go and check each fund in the universe to determine if they are legit and then invest in them But pension funds need to ask, you know How much experience do these multi managers have and how well do these multi managers understand the investment process of each manager? Then like I said, they should also ask how are fees determined with each of the underlying managers and what happens if let's say fund a is the best and But their fees are too high because that's another little potential benefit of the funder funds is they might come to these guys and say listen here Not only am I getting money from this pension fund, but I'm getting money from this other pension fund chairs wall So we're gonna get lots of assets under management Can you guys reduce your fees and a lot of the time these funds say yes We'll reduce the fee in order to get more of the business and then the funder fund that extra fees that they save They then keep for themselves But now what happens if fund a is brilliant and they say well no stuff you because we're doing so well We don't have to you know lower our fees What does the fund do do they just then ignore that fund and only invest in the others? Which is then detrimental to the other pension funds or do they say okay? No fine We'll still go with you guys, but then the other funds are gonna be like hey, that's unfair. So how is that whole relationship managed? Now one of the other big benefits or one of the big benefits said in the textbook is that funder funds offer diversification That is not always the case sometimes diversification is just a master word for dilution Especially if this manager is betting on one share and this manager is betting on the other share what you're not diversifying you're just diluting both of the positions and What you're doing is you're just paying a lot of asset manager fees and you're not getting any return and After the fees it's gonna have a massive performance drag and this index fund is gonna be outperforming Your funder funds. So that's something to consider Something else that your textbook probably won't tell you which I think is quite a big benefit of funder funds is They might actually give you access to funds that are soft closed So fund a might have been doing so well that they say listen here. We don't deal with any new investors So we're closing our fund to new investors And we're only gonna be accepting funds from our existing investors just to save on admin and all those various things then The pension fund won't be able to directly invest in fund a because they would be a new investor The only way they would be able to access fund a is through a fund of fun So that's a massive advantage that you must mention in an exam and it's probably not stated anywhere in your textbook Other than that, I mean, you know, we've really spoken that they might be able to negotiate better fees They might be able to give better liquidity depending on what the various lockout rules of the various funds So that's going to depend very much on circumstances Yes, the liquidity is very dependent But you're always going to get marks if you mention that the fund or fund might have a lower minimum investment required Especially in the cases of hedge funds. So hedge funds are like we will only accept you if you pay us, you know $10 million or more where the fund the fund might have a 1 million minimum investment And they still have access to these other funds because they're getting it from multiple pension funds So that is something to to consider But at the end of the day, it's very important to realize that The this whole thing of multi managers I mean in my opinion it is madness because you're paying more fees You're adding a layer of complexity and not only are you believing that the market is active or inefficient that these fund Different funds, you know can actually generate that extra alpha, but you're believing that you can choose the superior Fund manager. So that's why at the end of the day despite having all this discussion I still think it is superior if you don't bother with asset managers and analysts and all those stuff of guys Just go directly to the index fund It's cheaper and it's probably gonna give you much better returns in the long run but that's just my personal opinion and Remember this is an educational video. It's not financial advice, but anyway I hope you guys enjoy this video and if you have any questions, please feel free to ask them in the comment section below Thanks guys. Cheers