What it means
Every investment manager has a style, such as favouring cheap shares or fast-growing ones, and every style has periods when it does well and periods when it struggles. If one manager runs everything, the investor takes on the full risk of that manager's style going out of favour.
Splitting the money lets the strengths and weaknesses of different managers offset one another. Large investors such as pension funds, endowments and family offices often hire several managers and then oversee them as a group.
A common structure is a core and satellite design, in which a low-cost core holding tracks the market and a few specialist managers add return in selected areas. The investor decides how much to allocate to each manager and monitors performance against agreed benchmarks.
There are costs. Fees are paid to each manager, monitoring takes time, and managers may end up holding the same shares or taking opposite positions, so the investor pays two fees to cancel out a trade.
Sometimes the combined portfolio ends up looking like the market overall while costing far more than an index fund would. For finance professionals, the key calculations are the blended fee and the overall return after fees.
The blended fee is the weighted average of each manager's charge. It should be compared with the extra return that the multi-manager approach delivers.
The nuance is that diversification among managers is useful only when their styles genuinely differ. Hiring three managers with the same approach adds cost without adding protection, so the selection process should focus on how each manager's returns behave relative to the others.
Oversight is the hidden workload in this approach. Someone must set guidelines, review reports, meet managers and decide when performance is poor enough to justify a change.
Many investors hire a consultant or a specialist platform to help, which adds another layer of cost that should be included in any comparison.
In practice
Real-world examples.
Example
A university endowment of $400,000,000 hires separate managers for US shares, international shares and bonds. The investment committee meets quarterly to compare each manager with its benchmark and decide whether to add or withdraw money. The committee also reviews fees across all managers once a year to make sure the total cost remains reasonable.
Example
A family office wants exposure to small companies and to emerging markets but lacks the expertise. It appoints a specialist manager for each area, and keeps the rest of its money in a simple low-cost fund. The office keeps notes on why each manager was chosen so that future decisions are consistent.
Example
A corporate pension scheme finds that its three share managers all hold the same large technology companies. The trustees conclude they are paying three fees for one exposure and replace one manager with a different style. The new manager's results are expected to behave differently from the others, which is the point of the change.
Formula
Calculation
Blended fee = Total fees paid / Total assets
Fee for each manager = Amount allocated x Manager's fee rate
Suppose an investor places $10,000,000 with three managers. Manager A has $4,000,000 at a fee of 0.50%, which costs 4,000,000 x 0.0050 = $20,000. Manager B has $3,000,000 at 0.80%, which costs 3,000,000 x 0.0080 = $24,000. Manager C has $3,000,000 at 0.60%, which costs 3,000,000 x 0.0060 = $18,000. Total fees = 20,000 + 24,000 + 18,000 = $62,000, so the blended fee = 62,000 / 10,000,000 = 0.62%.Case study
Seen in the real world.
Harbour Mutual Pension Fund is an illustrative, fictional scheme with $200,000,000 in assets. For years, it used a single manager, and when that manager's value-focused style lagged for three years in a row, the fund fell well behind its peers.
The trustees moved to three managers with different styles: value, growth and a low-volatility approach, allocating $80,000,000, $70,000,000 and $50,000,000. The blended fee came to 0.55%, or about $1,100,000 a year on the whole fund. They also set rules for rebalancing each year so that the weights stayed close to the plan.
In the next market cycle, the growth manager outperformed while the value manager lagged, and the combined result tracked the benchmark more closely. The illustrative lesson is that spreading money across styles helped smooth returns, and the trustees accepted a higher fee as the price of that stability.
Watch out
Common mistakes.
- Hiring several managers with the same style and expecting better diversification.
- Ignoring the combined fee, which can be much higher than a single index fund.
- Judging each manager in isolation instead of looking at how the whole portfolio behaves.
Questions
People also ask.
Why use more than one manager?
It reduces the risk that one manager's style or mistakes dominate the result and lets the investor access specialist skills. It also gives the investor a chance to replace one manager without disrupting the whole portfolio.
How is the blended fee calculated?
Add up each manager's fee in dollars and divide by the total assets, or take a weighted average of the fee rates.
Is it suitable for small investors?
Usually it suits larger investors, because minimum investments and administration costs make it expensive on small portfolios. Smaller investors can still get some of the same benefit through funds that combine several managers in one product.
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