In the past few years, more institutional investors have adopted a “multi-manager” investment practice, where they allocate their money over several asset management houses. At TKP Investments (TKPI), an AEGON subsidiary, this investment practice is nothing new. Since 1989, the independent asset manager, formerly known as the pension fund administrator for the Dutch telecom and postal companies, KPN and TPG, has invested worldwide through a number of external asset managers.
As multi-manager investing was not yet in fashion at that time and the name multi-manager investing hardly existed in Europe. TKPI can therefore be considered as a multi-manager investor ‘ahead of its time’. Over 15 years of experience in searching, combining, contracting and monitoring of external managers have given TKPI a significant competitive advantage over other market participants, who started recently.
The reason that many investors now find their way to a multi-manager strategy might be found in disappointing returns of single-manager balanced mandates or in the fact that many investors lack the number of skilled professionals needed to make worldwide investments. Another reason might be an aim for better diversification.
When an investor makes use of a multi-manager structure, the security selection is handed over to a set of external asset managers. This multi-manager type of investing appears in several forms. An investor can, for instance, give his money to a multi-manager, who not only selects managers, but also performs asset allocation and country selection. The simplest form, however, is one in which the investor himself does asset allocation and leaves just the manager selection to a multi-manager. Depending on the type of multi-manager investing, the fee may also vary.

Investing with a multi-manager structure
Multi-manager investing is becoming more and more popular, especially with medium-sized pension funds. They do not have the full resources and budget to accomplish a well-diversified, worldwide portfolio, though they do have the need for sufficient and stable returns. Selecting, combining, contracting and monitoring external managers is a job that needs to be done by professionals. This is where the multi-manager comes in.
A multi-manager aims at selecting asset managers who will generate consistent outperformance over their benchmark. Ideally, the performance of the asset managers should have a low correlation to each other, so that if one of the external managers underperforms over a certain timeframe, the outperformance of another manager should compensate for this. Clearly, the art is not only in the selection of the individual managers, but also in the combination. Obviously, this is where multi-managers find their or raison d’être. They offer the highest skill for each region and a great diversification over themes and styles.
With its long history of selecting and monitoring asset managers, TKPI is very much aware of the fact that a positive performance history does not guarantee anything for the future. An asset manager’s positive historic performance figures must be supported by a logical investment theme, a transparent and repeatable process, and a robust organization in which all key functions are occupied by skilled and experienced staff.
TKPI spends great effort in the selection and combination of asset managers. Number crunching is done at an early stage of the selection of external managers. From a wide universe of managers, a selection is made that consists of managers with a positive and stable history of outperformance. TKPI performs extensive due diligence work on each asset manager to make sure that TKPI understands every piece of the asset manager’s investment process and organization.
The managers TKPI employs, are a blend of large well-known investment houses and smaller boutique-like investment specialists. The big houses have the advantage of highly regarded infrastructures and very solid financial backing, while the specialist houses have the advantage of being extremely focused niche players. Operating this way gives TKPI’s clients access to local expertise all over the world.

Performance
Investments carried out by focused local professionals will likely improve the performance of an investment portfolio. The local asset managers have faster and better access to local resources, are in many occasions better informed of local developments, and they do not have to struggle with time lags when they initiate trades. It ultimately pays off to be ‘on the ground’ all over the world.
The cost of a multi-manager investment
A multi-manager investment style could easily be criticized as an additional layer of fees. As with other things, the truth is somewhat more complex. By investing in a multi-manager pool, the investor avoids spending a lot of money on people and infrastructure to invest worldwide by himself. On top of that, by investing in a multi-manager pool, the investor also profits from economies of scale, since his assets are combined with other investors’ assets. Combining assets gives the multi-manager a strong negotiating advantage in acquiring external management services at very low cost. Thus, even smaller investors can profit from the economies of scale that exist in the world of asset management. It is therefore better not to speak of an additional cost, but to view it as a different cost.

Multi-manager at TKPI
TKPI offers multi-manager solutions for different asset classes. On the traditional equity side, TKPI manages several multi-manager pooled vehicles that are tax-efficient for Dutch pension funds, including among others a worldwide equity pool, a euro-bloc equity pool, and a worldwide product with a US dollar hedge. Furthermore, several active and passive pools are available for fixed income including one for inflation linked bonds. For alternative assets, a real estate multi-manager vehicle, a commodity fund, and an equity market-neutral multi-manager fund are available.
TKPI is also able to advise the investors about their strategic allocation among asset classes. The newest development at this innovative multi-manager is TKPI’s ability to offer tactical asset allocation through a multi-manager structure. This can be used in addition to a strategic allocation and is nowadays widely appreciated as a stable source of additional uncorrelated alpha. Of course, tactical allocation can be employed on a stand-alone basis, where the investor will choose a beta he wants and acquires the alpha from such a fund.
Coos Luning is a senior portfolio manager with TKP Investments

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