The past decade or so has seen a dramatic rise in the numbers of multi-manager funds, as growing numbers of investors, and their advisers, have realised that holding a broad spread of funds within a single portfolio is a practical means of getting above-average returns for below-average levels of risk.

One of the newer entrants to this field is North, a specialist multi-manager boutique set up in 2005. But its relative youth is backed by a wealth of experience in selecting funds that are going to outperform, since its investment management team is headed by John Husselbee, who has over 20 years’ experience in fund manager selection. ‘You must have the experience to research the whole market, to make the right fund selections,’ he says, ‘and I have been looking at manager selection for 21 years.’

Pioneer spirit
Husselbee is, indeed, one of the pioneers of multi-manager investing, having started his career analysing fund managers at Rothschild Asset Management (RAM) in 1986. After setting up and running RAM’s portfolio management service, he moved
to Henderson Global Investors in 1996, where he was responsible for a range of multi-manager funds which, during his time with the firm, grew their assets under management from £60 million to more than £650 million.

The opportunity to set up his own business specialising in multi-manager funds proved irresistible, given the way that the sector has developed over the past two decades. He observes that ‘We now own ourselves 100 per cent, and the combination of offering absolute returns and this alignment of interest with customers is very powerful.
‘I ran multi-manager funds at Rothschild and Henderson for over ten years, but I had the feeling that the attractions of having a multi-manager product would be too great for some of the larger groups to resist.’

Husselbee’s view is that ‘We have now come to the stage in the cycle of development for the multi-manager sector when you have either got to be Tesco and dominate the market, or you have to opt to be small and niche. We have opted to be small and niche, and we have found that the boutique concept has proved
to be very acceptable to intermediaries and their clients.’

Concentrating on the basics
North is a genuine boutique, concentrating on providing funds that perform well and fulfil a specific role in investors’ portfolios. His rationale is that ‘Like any company these days, you try to keep control of the things you do that add value – such as your investment performance and the way you treat your clients – and you outsource the rest.’

Husselbee says, ‘I liken it to a marathon. Ten years ago, a lot of people started running marathons just hoping to get round the course, but as they get stronger and fitter, train more and run more marathons, they start running faster times and the overall standard improves. As a result, they start setting their goals higher, wanting to run faster times and improve their results. We are now at the stage where we don’t just want to get round the course, we want to win the race.’

He formed North in August 2005, with two colleagues from Henderson, Rebecca Murphy and Oliver Wallin. Wallin largely deals with the marketing of North’s funds, while Murphy, who also worked with Husselbee at RAM, handles the business development, legal and administrative side of the business, leaving Husselbee free to concentrate on managing the funds.

Not surprisingly, Husselbee is firmly convinced of the attractions of the multi-manager approach. ‘I have seen the industry expand rapidly over the years and believe there is room for it to grow and develop further. Multi-manager takes time to build up funds under management, but when they are there, they tend to stick.’

More diversity, better returns
He argues that the attraction of this approach for many investors is that it gives them access to a much broader range of investments than would otherwise be the case. ‘“Multi-asset” is a buzz phrase, and previously this sort of approach was only open to high net worth investors, but I see it as simply a matter of evolution.’

He explains, ‘The traditional asset mix has been equities, bonds and property. You make better long-term returns from equities, but you invest in bonds and property at different times to lessen the risk. The result is that you get a long-term return that is slightly less than you would get from a pure equity portfolio, for about half of the level of risk. So if you then add more asset classes – things like hedge funds, structured products, private equity or commodities – you should actually be able to come up with a mix that will outperform equities without increasing that level of risk.’

He also has an answer for those who regard multi-manager portfolios and funds of funds as adding an extra layer of unnecessary cost. ‘Our total expense ratio may be around 2.2 per cent, compared to 1.6 per cent for a straight equity fund, but we are better equipped to perform. It is like the horse at the top of the handicap: it is there because it is a better class of animal.’

A helping hand
What helped get North off the ground was the considerable support of Neptune Investment Management, itself a rapidly growing investment house with a strong performance record. North was established as a subsidiary of Neptune (the management team completed a buy-out earlier this year) and its first funds came via this connection.

Husselbee explains, ‘Neptune had two funds for us to run – a global growth fund and a global income fund. These were high-conviction funds of investment trusts that they had acquired from Quilters. The portfolios had been quite volatile and these ups and downs were largely due to movements in the discounts on their underlying holdings.’
He adds, ‘So we converted the funds to COLL status, which enabled us to add other types of funds to the portfolio, including open-ended funds (both onshore and offshore), ETFs, structured products and, if I want to, direct gilt holdings. This enabled us to introduce other asset classes.’

Husselbee points out that ‘We are interested in running portfolios across seven or eight asset classes. Asset classes must be measurable and deliver performance over time, but should also have a low correlation with other asset classes.

‘Risk traditionally looks at measures of standard volatility, but these days you tend to look more at maximum loss calculations. The simple question is, “How much can I lose?” and a portfolio spread across, say, seven different
asset classes, should limit your maximum loss.’

This is a question that private investors have asked for generations but which fund managers seem only to have come to appreciate relatively recently, as the focus has shifted from relative returns – measuring performance relative to an index even if that index is falling – to absolute returns.

Changing market conditions
Husselbee points out that ‘Fund management groups tended to ignore absolute return funds for much of the 1980s, when equities significantly outperformed all other asset classes, even after allowing for the ‘crash’ of 1987. Investment was seen as being all about outperformance and relative performance. When the market goes up, people think in relative terms, but when it goes down, they start to think about absolute returns.’
He adds, ‘Both fund managers and investors are only really concerned with relative returns in a bull market, which I define as a market where the price to earnings ratio is rising and the yield is falling. The reverse is true in a bear market.’

This is particularly important in the current climate, where investors cannot simply rely on a general exposure to markets to make them money. Husselbee feels that ‘We are in a situation now where I don’t think markets will move very much for perhaps seven or eight years, but within that there will be periods of strong equity markets and weak equity markets. In other words, equities will be very volatile. So whereas during the 1980s and 90s you made money through buy-and-hold strategies in the equity market, that no longer applies.’

He stresses that ‘With equity markets becoming more volatile, investors have opportunities they haven’t had before to diversify into other areas. A good example is energy. A lot of money has gone into the alternative energy area and it is not really making a return as yet, while the oil price has been rising. There is still plenty of oil in the ground, the difficulty is in getting it out. As a result, there will be a premium for that, which means that higher oil price levels should be sustained.’

Husselbee reports that ‘Following this theme, we now have holdings in things that you couldn’t have invested in five years ago. For example, we hold something called CQS Rig Finance, which is a corporate bond fund that is providing finance to an oil industry that is undergoing a rejuvenation. It should provide returns irrespective of what happens to the equity or bond markets generally.’