I do not have some easy solution to this problem – two obvious and tried possibilities are: ‘best ideas’ portfolios that remove the concept of indexation for the underlying managers, leaving only alpha generators to be combined; and the ‘engineering’ of multi-manager portfolios to systematically remove the impact of risk-reducing positions to a more sensible level. But both of these are complex and require large-scale systems and direct, mandated relationships with fund managers. On a simpler and more practical level, perhaps we just need to be cognisant of this when speaking with fund managers. Understanding how each manager uses risk-reducing positions (and, in some cases, forcing them to admit they do) can be a useful process in building a better multi-manager portfolio. And, perhaps, by actively monitoring the size of stocks that we view as being risk reducing, we can suffer less from unintended consequences. Although, of course, in so doing, we might find ourselves creating other unintended consequences.
James Bateman is head of multi-manager and multi-asset portfolio management for Fidelity Worldwide Investment
