Multimanaged funds have advantages

When you think about who is managing your mutual fund, you might imagine a single person making most of the decisions. But portfolios often are divided among a team of people, or even split between subadvisers with dramatically different investing styles, an approach known in the fund world as multimanagement.

For small investors, there can be some advantages to having your dollars divvied up among different managers, said Russ Kinnel, the director of funds research at Morningstar Inc. Unlike offerings that are team-managed - meaning they're run by a group of people working under the same roof - funds that use a multimanager approach seek subadvisers with different investment strategies, styles and research, which can diversify risk and smooth out volatility.

"There are some positives to multimanagement; one is you get diversification of strategies and investments," Mr. Kinnel said. "What you're doing is diversifying at another meaningful level that you'd have to pick separate funds to do."

If you invest in offerings from companies like Fidelity Investments, American Funds or T. Rowe Price, you probably haven't run across portfolios that take this approach, because these shops manage most or all of their money in-house. Prominent fund providers that outsource the management of funds to subadvisers include the Vanguard Group, Masters' Select Funds and American Beacon Advisors, a subsidiary of AMR Corp. which grew out of American Airlines' pension fund.

One advantage of multimanaged funds is that they often allow small investors to place their money with excellent professional managers who they might not have access to otherwise, said Wayne Wicker, the chief investment officer of Vantagepoint Funds, a family of offerings for public employees that uses the approach. They also eliminate the risk that comes with putting all your eggs in one basket.

"When constructing multi-managed portfolios, we're really focused on finding the best stock pickers we can in the country. We're focused on top managers," Mr. Wicker said. "But what really differentiates a multimanaged fund is to find good ones with low correlation to one another. While one manager may be out of sync, the other two may be doing just fine."

Best known for its index funds, Vanguard also offers 26 actively managed equity funds, most of which are run by carefully chosen outside subadvisers. Of these, 11 are multimanaged, including Vanguard Windsor II (VWNFX), a $42 billion mid-and-large-cap value portfolio run by five different sub-advisers who each take a different approach. Jim Barrow, of Barrow, Hanley, Mewhinney & Strauss, is in charge of about 60 percent of this fund, while the other four sub-advisers handle pieces ranging from 5 percent to 15 percent, said Joe Brennan, the principal in Vanguard's portfolio review group, the team that monitors external advisers.

"We hire firms that manage pieces of the funds independent of one another," Mr. Brennan said. "They're not really sharing ideas. We're employing managers with the best ideas and approach and putting them in one fund. This reduces the risk that comes from just one adviser or strategy."

If it's done right, the multimanager approach can help temper short-term volatility without sacrificing returns in the long run, Mr. Brennan said. The idea is to combine managers with styles that are different enough that their periods of out-performance come at different times.