It is important to understand how closely different asset classes move together. By looking at the correlation of performance and volatility between each asset class the multi-manager team can examine the risk/return of a range of asset mixes. The team can then determine what it believes to be the ideal asset allocation for the fund.
After determining the asset allocation, the managers conduct a rigorous fund selection process which requires extensive and detailed knowledge of the individual managers, their investment style, how they behave over different periods of the market cycle, as well as a good understanding of the underlying portfolio. Through this process the managers can select the best fund managers and investment products.
The next stage is portfolio construction where the team ensures the strategy is implemented with the appropriate level of risk.
The underlying funds are reviewed constantly to ensure their mandates fit with the multi-manager team’s stance regarding the market at that point in time; strong performance is not enough to ensure a fund remains in the portfolio. The team will consider:
- if the strategy is still relevant
- if the funds selected are behaving as expected
- whether changes should be made