Are one-stop shops feasible?
Firms that offer multi-management investment services can save pension funds a great deal of administrative hassle – they provide the client with a layer of diversification without them having to deal with a large number of individual fund managers.
And some multi-managers in Europe are now going a step further. They are offering pension fund clients access to a wider range of strategies. But in today’s liability-driven world, can they every offer the full one-stop solution for pension funds?
Whether a multi-manager has the resources and expertise to act as a one-stop solution for a pension fund depends on the size of the client, says Lee Freeman-Shor of Schroders. “For large institutional clients, we definitely can do it,” he says.
Besides funds of funds, pension funds seeking ways of maximising returns while at the same time fitting their investment profile to suit their liabilities, often need to have access to alternatives, overlays and other strategies.
As a multi-manager, Schroders says it builds models to the client’s exact requirements based on the risk budget. Clients tell the multi-manager their goals with regard to risk and return, then Schroders builds the model. To do this, it uses its own PRISM system – Portfolio Risk Investment Strategy Manager – which allows risk to be controlled at the stock and market level.
“We can build a one-stop solution,” says Freeman-Shor. Similarly, for retail investors, Schroders can offer one-stop solutions in cases where the ceiling on assets may lie at tens of thousands of pounds sterling, rather than be at the million pounds level of institutional investors. But for these smaller investors, the products are off-the-shelf and do not have the advantages that come with a product which can be tailored to suit a particular risk profile.
However, even with an off-the-shelf product, risk information is still available in detail to clients. “We can give them all the risk measurements they want so they can be as accurate as possible,” says Freeman-Shor.
In terms of pension fund clients, Schroders can offer investment packages which include Asia, Latin America and the Middle East. And it is also possible for them to access alternatives through Schroders, he says. “We can give access to any asset class, also derivatives. We have all the tools available to construct a portfolio.”
He adds: “Any fund we invest in is required to give us the underlying security data on at least a monthly basis, and because of that we can be very cute.”
Mark Thompson, investment funds director at Prudential in the UK, says that although multi-manager solutions can be very useful for pension funds, it is vital to keep sight of what is the most important element of the whole exercise.
“The most important decision is overall asset allocation,” he says. “There is a danger that people see multi-manager as an overall panacea, but someone has to be doing the asset allocation as well. Somebody has to be doing that – is your multi-manager doing that for you?”
It is crucial to get the asset allocation to match liabilities, and while there is a place for multi-management, it is secondary to that, he says. Pension funds can do their own asset allocation, though Thompson questions whether some have the necessary skills to do it properly.
One of the key skills at Prudential is asset allocation, says Thompson. “We deal very widely in the DC bit of the market.” There is always an adviser involved, such as Mercer or Aon, he says, and it is the advisor who would deal with the strategic part of the asset allocation. The tactical part, however, would be done by Prudential.
Prudential manages significant assets on its own behalf through the Prudential With-Profits pension fund, which has around £70bn (€102bn) under management. “We do all the asset allocation for that,” says Thompson.
Tony Earnshaw, managing director of Northern Trust Global Advisors, the multi-manager arm of Northern Trust, says multi-managers do have the capabilities to offer a one-stop solution to their pensions clients. “But whether in practice they do is another question,” he says.
Managers of managers tend to focus on the traditional long-only asset classes with some hedge funds and private equity, he says. “We have all three of those, but
certainly in Europe and the UK, the focus has been very much on long-only.”
Currency overlay can be incorporated in manager of manager services, but up until now, there hasn’t been the demand for providers to do this. “But I suspect that may be changing,” he says, adding that in the pensions industry the talk is very much of liability-driven investment.
Now that the bull market is very much out of the way, and all participants realise there will be fewer returns to be had, people are trying to squeeze everything they can out of their portfolios, says Earnshaw. There is now a need for deeper levels of diversification, and this, in turn, is leading to a broader-based demand in terms of investment offerings.
So the players in the investment product provision marketplace – multi-managers or single fund managers – who do have experience offering a wider range of options are likely to have an advantage over those whose palette is smaller. Earnshaw says that although currency overlays are not usually called for in conjunction with multi-manager products in Europe, NTGA does run a portfolio for a Japanese client which has a currency overlay on it.
“That puts us in a strong position because if we feel it is a thing that clients want; we know the players.” NTGA’s business in Europe ex-UK is growing well, he says, though it is a relatively new development.
While the capabilities are there, whether or not it is feasible to implement some of the strategies mentioned depends on the size of client assets involved. “There’s quite a lot of stuff we could do given the scale and demand,” says Earnshaw. “Even in the traditional area – the liability matching on bonds for very mature schemes – even that we could do if it was big enough.”
There is a critical size for an asset class, below which it is not really possible for a multi-manager to offer a client services that are
tailored to requirements, he says. “In traditional asset classes like UK equities, because we’ve got a pooled fund structure, we can do any size,” he says. “But if you set up something tailored, you need at least £60m.” This level of asset volume would allow the portfolio to be split and divided between three different managers, he adds.
And on the fixed income and liability-matching side, if the client wanted to include five maturities in the allocation, diversifying between two managers in each of those maturities, in order to have £10m in each would mean the overall asset class size would have to be £100m, he says.