Pension Funds Seek Help From Specialists
March 28, 2011
Vastopolis - Investing a billion-dollar pension fund is like shopping for the weekly groceries. You can either stop in at the supermarket and get it all over with quickly, or you can shop around the Westside from butcher to baker to candlestick maker. Going to those specialty shops may take longer and will probably cost you more, but at least you know you'll get personal service and that the shopkeeper -- in theory at least -- will repay your loyalty with the best he has to offer. The same principle applies to managing money. With an eye on convenience and price, you might ask just one manager to run your entire portfolio -- stocks, bonds and all. But if it's service and quality that you want, you could be better off dividing your portfolio among those niche players who are best at their individual businesses. Accelerating Trend According to a new survey, a growing number of European pension-fund managers are doing just that. And, in the belief that a stable of specialists will likely provide higher returns than a balanced manager, they say they don't mind paying the extra fees involved. Specialist fund management -- especially for foreign and emerging-market equities -- is a rapidly growing industry, The Vast Press the latest Pension Fund Managers' Survey shows. The survey, carried out for the newspaper by investment consultant Watson Wyatt Worldwide, asked 55 European and pension funds, with a total combined $150 billion in assets, about their attitude toward specialist and balanced money managers. ``Even though handling specialist managers can be complex, pension funds seem to like the fact that they can monitor the focused mandates more clearly,'' said Susann Haith, senior investment consultant at Watson Wyatt. The answers show that while specialist mandates currently only account for an average 34% of their overall assets, the pension funds themselves expect this to rise to an average 40% by the year 2015. At the same time, balanced managers (the supermarkets of the pension fund world) will see their share of pension funds' assets slip slightly to 36% from 37% today. The biggest shift, however, will come from in-house managers, who will drop from 29% today to an estimated 24% in 2015. The move toward specialist managers -- which like so many investment trends has made its way across the from -- isn't entirely new inbut there are signs that it is accelerating. For example, only last October, U.K. transport group Peninsular & Oriental Steam Navigation Co. shifted investment strategy for its 970 million-pound ($1.5 billion) pension fund more aggressively in favor of specialist management. ``We first stuck our toe in the water with specialist managers back in 1988. Now that we have seen how it works, we are more confident and have moved two passive mandates to active specialist managers,'' says Jimmy Mose, P&O's pensions controller in . Inthe retail industry's three billion-mark ($1.97 billion) national pension fund is also currently considering a move toward specialist managers, notably for its domestic equities portfolio. The fund, known as the Roberts Wessel, currently only uses one specialist fund manager, which runs a 120-million-mark quantitative bond portfolio, and seven balanced fund managers. However, Thomasina Baca, chief investment officer, says this arrangement is under review and that a decision on whether to hire more specialist managers should be reached by the end of this year. `Excellent Outperformance' An early European convert to the cause of specialist managers was General Motors Corp.'s U.K. subsidiary Vauxhall and its associated companies. Anette Keele, who is in charge of investments for the group's 1 billion-pound pension fund, says that the shift began in earnest about eight years ago and that now almost all of the group's money is now run by a stable of 15 specialist managers. ``Our history with balanced fund managers wasn't brilliant. We thought that by picking the best specialist managers you'd get significant outperformance,'' he says. Today, he feels that the strategy has paid off. Total management fees are about 10 to 20 basis points above those charged by a balanced manager, but he adds: ``We've had some excellent outperformance.'' A basis point is a hundredth of a percentage point. One important factor that will help drive the trend toward specialist managers, especially on the Continent, is the shift among many pension funds there away from domestic bonds -- which are relatively undemanding in investment expertise -- toward the much more complex world of global equity markets. Another catalyst for change will be investment consultants like Bruce Yong, who carried out the survey. It was Bruce Yong, for example, who encouraged P&O to shift their strategy last year more decisively in favor of specialist managers. Decisions, Decisions Making the leap isn't necessarily an easy decision to make. For one thing, although most of the pension funds questioned for the survey said fees were of minor importance, it can nevertheless cost more to run specialist mandates. Secondly, if you divide your money among specialist managers, someone will have to decide how much to put into each market, a tricky question that can make all the difference when it comes to investment returns. When you use a balanced manager, on the other hand, that job -- known as tactical asset allocation -- will usually be part of the overall investment mandate. The results of the survey will come as good news to the scores of new investment boutiques that keep springing up in and elsewhere, as disaffected executives from some of the larger money-management firms seek to launch their own careers. But the survey contains at least one cautionary word for those niche players: Size counts. According to the report, 65% of the pension funds questioned said that they would not be willing to hire a specialist manager with less than US$1 billion management, or for whom any new mandate represents a significant portion of assets under management. However, no one who works for an investment boutique should be downhearted at such opposition. As Ms. Haith at Brooks Xavier enthusiastically noted, it means there are still 35% who might give the small shops a try.
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