By Hamlin Lovell, NordicInvestor

Multi-manager portfolios can be expensive while the most obvious ways to save costs – such as standardised passive investing – can also compromise on customisation in terms of managers, ESG and risk. Russell Investments’ innovative EPI offering, which has grown to EUR 90 billion of assets over 14 years, can potentially offer the best of both worlds.

Multi-manager mandates are most often structured as a fund of funds, although a fund of managed accounts (FOMA) may be more efficient for liquid strategies and asset classes. Minimum ticket sizes for managed account structures need not be prohibitively high: it is possible to structure a FOMA with as little as USD 100 million across four managers, according to Maarten Roeleveld, Institutional Director at Russell Investments in the Netherlands, who argues: “we aim to centralise implementation to generate costs savings and improve operational efficiency for multi-manager portfolios. A fund of funds structure is expensive and layered with fees”.

Russell Investments was once seen as mainly an investment consultant but has been boasting both asset management and brokerage licenses for decades and mainly acts as a fiduciary manager and outsourced CIO. Increasingly, the implementation capabilities of the firm are becoming a focal point, especially in EMEA. FOMA structures used for the firm’s own mandates can also be offered on an execution only basis – without any advice on asset allocation or manager selection.

Asset managers are attracted by the chance to lighten their operational burden. “Fund managers just pick stocks and send lists to us. We then centralise all trading and operations for all managers in a single custody account,” says Roeleveld.

Cost and netting benefits

Transaction cost savings can come partly from the agency model of shopping around multiple venues to obtain better pricing, in areas such as FX execution and passive hedging (and agency trading in FX, equities or fixed income can also be offered on a standalone basis).

There can also be substantial netting benefits – both within individual client portfolios, and between multiple clients.

If multiple managers have duplicated trades, we net them out. Additionally, managers rarely have scope to determine the actual size of their trades as part of the larger multi-manager portfolio. When centralised we can take the overarching view to remove applicable de-minimis trading activity. Then, when managers and clients have offsetting FX trades, we also net those out, and bring fewer trades to the market, with a huge multiplier effect. In FX we match all trades for all clients, netting internally, so that only the residual goes to the market. All accumulating to about 33% less trading a year, which means 1/3 less cost to implement,” explains Roeleveld.

Russell Investments’ agency trading desk, open 24 hours a day and 6 days a week, aims to deliver the lowest transaction costs and execution costs. The firm claims to have achieved competitive execution in equities, fixed income and currencies. Benchmark savings were calculated at 28.4 bps for equities, 5.8bps for FX and 1.9bps for fixed income.

The potential savings vary by asset class, geography and strategy.

The biggest netting benefits are in FX followed by equities and lowest in fixed income. (This part of Russell is not active in commodities).

Inefficient markets with higher trading costs can also produce more savings: “in an emerging market mandate, where costs to trade are higher, with 3 or more managers we see cost savings returned to the portfolio in excess of 30bps, whereas savings in the more efficient US market would usually be smaller because of the efficiency of the developed market,” points out Roeleveld.

Execution savings could be greatest for smaller managers, which might not have existing access to the most sophisticated multi-venue trading desks.

The largest offsets and netting benefits will typically come from a mix of active and passive strategies, followed by pure active. “There is however limited benefit for pure passive mandates that are focused more on tracking error than efficiency,” acknowledges Roeleveld. “We only aim to offer these services where they can achieve meaningful savings,” he adds.

Taxes and contract savings

Lower portfolio turnover can also reduce transaction related taxes, such as stamp duty on equities in the UK.

Other cost savings can come from a single contract with Russell Investments rather than having to negotiate multiple contracts with asset managers and potentially counterparties as well.

Management fees

Where managers have an existing relationship and fee agreements with Russell Investments, there may also be scope to save on management fees. Where the firm  has a lower fee schedule it can be  passed on to clients.

The platform includes many household name asset managers globally, and also some smaller boutiques, such as a UK-based emerging market specialist that runs a frontier markets mandate for one of Sweden’s AP funds. So far, over 120 managers have been onboarded to the platform as of February 2023. The minimum level of total assets could be as low as USD 100 million, meaning individual manager allocations can be even smaller. And in principle open architecture means that Russell Investments is open to onboarding new managers.

Transition Management

Russell Investments’ efficient portfolio implementation model  reduces the need for transition management, since a switch between managers is seamless, instant and automatic. The assets are already held in one centralised custody account so there is no need to transfer between other structures or vehicles.

Where asset owners are using third party structures, transition management can be offered on a standalone basis to help bridge the gap between changing managers and avoid “performance holidays” where they are uninvested. “The time frames for transition can range from days for some strategies out to months for listed real estate. The speed also partly depends on what volume of trades can be efficiently executed given market liquidity,” says Roeleveld.

Risk and ESG reporting

The structure provides asset owners with a high degree of transparency, and Bloomberg risk reporting can be provided, including attribution, performance benchmarking and VaR analysis.

Managed accounts also allow for more granular and customised ESG policies than are feasible for comingled funds. These could target specific positive impact objectives such as decarbonisation or social impact, or companies with high ESG scores, as well as negative screening such as controversial weapons, gambling, tobacco, coal, tar sands, peat and other areas.

ESG reporting can include inputs from Sustainalytics, can continue during interim assignments, and can match the EU Sustainable Finance framework. “Since Russell Investments is an asset manager itself, it is familiar with SFDR reporting,” says Roeleveld.