Multi-manager investments, also known as mother funds or funds of funds (FOFs), refer to funds that invest in a portfolio of other funds rather than investing directly. The mother fund model allows for diversification across asset classes, investment styles, and fund managers. By selecting and combining multiple funds, mother funds aim to achieve better risk-adjusted returns compared to individual funds through diversification. The fund manager of a mother fund also actively shifts allocations between sub-funds based on market views. In China, mother funds are still at an early stage of development but hold promises as alternatives to traditional funds.
Mother funds provide diversification benefits
A mother fund invests in a basket of sub-funds across different asset classes, market sectors, geographical regions, and investment styles. This multi-layer diversification helps reduce volatility and downside risk. While individual funds may have periods of underperformance, the combination of multiple complementary strategies in a mother fund makes it more resilient to drawdowns.
Mother funds allow for active tactical allocation
The manager of a mother fund can shift capital between sub-funds based on changing market conditions and opportunities. During market turmoil when correlations rise, the mother fund manager can reduce exposure to risky assets. This dynamic allocation provides better downside protection compared to traditional static allocation funds.
Private mother funds flourishing in China
While public mother funds are still absent in China, private multi-manager products have seen strong interest in recent years, especially after the 2015 market crash. High net worth individuals and institutions appreciate mother funds for the transparent multi-manager structure, risk monitoring capabilities, and portfolio transition management expertise.
Public mother funds expected to grow
China’s fund management industry is evolving towards more institutionalization. Regulators have also shown support for fund of funds products. As the industry matures and investor sophistication increases, public mother funds catering to retail investors’ needs for one-stop asset allocation solutions will likely thrive.
In summary, multi-manager mother fund investments provide diversification benefits and potential for active management excess returns under the portfolio theory framework. This innovative fund product is gaining traction globally and will play an important role in China’s asset management industry going forward.