The multi-manager strategy would, on the surface, seem to have taken a knock from the market-timing scandal that hit the $7 trillion United States mutual funds industry. After all, with players such as Putnam Investment Management, Strong Capital, Alliance Capital, Janus Capital and Invesco striking settlements with the Securities Exchange Commission or Eliot Spitzer, New York State's attorney general, the multi-managers such as Russell, Northern Trust and SEI must have taken a hit.

Russell's Leonard Brennan, managing director in Tacoma, Washington, argues that although multi-managers did have exposures to these firms, the result should help their case for a diversified portfolio and the dangers of being too exposed to a single fund manager.

"The market now needs diversification and due diligence," he says. "Even if a fund manager isn't tainted by this scandal, do investors know all they need to know about how their money is being managed?"

Of course, the role of a multi-manager is to pick good fund managers. So how come they got stuck with firms engaged in questionable practices?

"No matter how deep our research is, we can't identify fraud," Brennan says, "but we do know how to respond to it...we don't research a house but their asset class capability."

In the wake of the market-timing scandal, in which fund managers at institutions such as Putnam and Strong traded international funds in different time zones for their own benefit, taking advantage of market events occurring after US prices closed. The practice is legal but breaks the fund companies' rules, and more importantly it works to the disadvantage of co-investors.

Russell responded by trying to determine if the scandal, the media frenzy, the settlements, would distract the fund managers from doing their job, or if the business of managing portfolios could carry on. "In some cases, firms were no longer able to concentrate on investment management," Brennan says. Russell finally decided to dump Strong and stick with Putnam, which had size and a big organization that could deal with clients and absorb the blow without upsetting the core business.

So does this mean that multi-managers will discriminate in favour of the biggest fund houses? Brennan says no, rather multi-managers will look more at compliance issues. "There are lots of good small managers," he says.

Russell has the biggest footprint in Asia among the multi-manager industry, including a large institutional business in Japan that derives from its consulting origins, as well as a retail business in Singapore that uses DBS as a channel. Brennan notes the market-timing scandal has been a US domestic affair, but will have implications worldwide.

"We're seeing more scrutiny by regulators and a need for transparency in markets like Canada and in Europe, better information about who you should be giving your money to," Brennan says.

"Actually Europe is ahead of the curve in demanding you appreciate a manager's qualifications. It began a few years ago with the UK investors appreciating what a fund's downside could be, not just its upside... in Asia, more big national funds such as the Korean National Pension Corporation and Taiwan's Public Service Pension Fund are considering global best practices as they start to invest offshore."