John Lappin looks at the evidence

Balanced managers may have passed their high watermark in the UK. But the evidence is conflicting.

Research by consultants Watson Wyatt suggests that 1997 may prove to be a watershed with pension funds switching to specialised mandates. Only 10% of the 127 manager selections that Watsons oversaw in 1997 were for balanced mandates while 52% were for specialist managers.

Major pension investment manager PDFM's annual survey conflicts with this, showing continuing dominance by and a slight increase in funds using balanced management, but a larger survey by the National Association of Pension Funds (NAPF) shows the amount of assets for balanced management holding steady while specialist mandates increase their share of the assets in 1997 although the absolute number of managers has declined.

Significantly both surveys were conducted before the change in dividend tax credits, and also pre-date the re-cent poor results achieved by some large balanced managers in the UK. This could be the reason for the discrepancy between the surveys and the experience of the consultancy last year.

Identifying the change in manager selection, Roger Urwin, the head of the Watson Wyatt's UK investment practice which consults on assets close to £200bn, said that the homogeneity of investment style among funds had been responsible for recent poor performance. The consultancy is clearly backing a more diversified in-vestment approach particularly for larger funds, a change in stance which can only exacerbate the trend he has identified.

While not advocating a wholesale move into other forms of management, Urwin's comments should be of concern to the big British balanced managers - Mercury Asset Management, Deutsche Morgan Grenfell, Schroders, PDFM and Gartmore.

Urwin placed much of the blame on the failure of tactical allocation within balanced mandates, with three of the big five underperforming the industry benchmarks for house median segregated balanced accounts returns.

The NAPF survey shows the number of balanced managers used increasing from 750 to 808 between 1996 and 1997 but with assets declining marginally from £121bn to £120bn. However while the numbers of specialised managers declined from 692 to 664, the assets under management increased from £70bn to £83bn over the year. 643 funds replied to the question in 1997 compared to 689 in 1996.

However PDFM's survey suggests a slight increase in balanced mandates. The survey received responses from 360 funds with the number of schemes regarding it as their principal form of investment increasing from 74% to 77% over the last year while the trend was particularly evident for the larger schemes. According to the survey, 59% of schemes with over £500m now principally use balanced managers, up from 48% three years previously while specialist schemes show a corresponding decrease. Indeed over the three year period, the preference for specialised management first in-creased at the expense of internal management and this in turn gave way to balanced management.

Within classes of specialist mandate, only index-linked and property in-creased but when questioned about future intentions there were increases in the number of managers considering specialist mandates for active international equity and for bonds and index-linked assets.

PDFM adds that, anecdotally, be-cause of the continuing balanced management bias, they expect a move from CAPS and WM general benchmarks to customised ones but this has not been revealed by the survey. The company suggests that this may be because specialised equity and bond mandates may be varied when the asset allocation is changed rather than the balanced mandates

Looking at the European context, the 1998 Mercer European Pension Fund Managers Guide suggests that the number of specialist mandates has been growing at over 25% per annum in recent years although the rate of increase is slowing. The UK could simply be running contrary to that trend. Mercer suggests that the growth in such mandates is linked to the trend for client specified asset allocation following from ALM studies.