Complexity makes life simpler for small fund
Thales Pensionskasse, the pension fund for the Swiss subsidiary of global aerospace, naval and engineering consultancy giant, Thales, may be small but that has not hindered its progress or its chances of winning an IPE Award for best country scheme.
Established in 1996, the scheme is a defined contribution arrangement with just 200 active members contributing to a fund with €47m, which also provides a pension and benefits for 20 retirees. Thales Pensionskasse entered the IPE Awards to demonstrate its asset management process which returned a massive 11% last year, following a much weaker 3% in 2004 and a healthy 7% in 2003. It was the feeble return in 2004 that got the scheme's various boards and investment committees round the table to try and turn the tide.
"We originally ran the scheme from a pretty simple and basic perspective. The assets were arranged in a balanced mandates. But we have had to rethink this strategy," the scheme says, citing weak performance of the mandate, difficulty in monitoring and limited tactical bets the asset manager could take as the background to the change.
Thales pretty much stripped its asset management philosophy to the bone and started again. The previous one balanced mandate run by one manager theory was thrown out and replaced by a more complex, comprehensive structure. This involved the implementation of a core satellite structure that uses both active and passive management. The core is indexed against the scheme's benchmark while the satellites are actively managed mandates. This strategy now incorporates a multi-style multi-manager approach which centres on 13 specialist asset manager categories.
An investment strategy that relies on a multitude of managers and styles needs careful supervision. If Thales was unhappy with the way it monitored its previous set-up, it has understood what it needs to do to make sure the new strategy runs smoothly and managers perform to their optimum. Thales says its performance measurement and monitoring process now includes a rigid monthly rebalancing model to ensure the strategic asset allocation policy is adhered to. A close manager supervision procedure checks daily that each manager is working within the scheme's investment guidelines, while their performance is measured monthly.
Thales says this may seem rigid but it falls within the scope if its revised objectives which are to improve the risk management and risk controls, to improve the quality of its asset management and returns, and to develop a process whereby it can more closely track the board's strategic asset allocation guidelines.
Thales says it is more than satisfied with the results - returns last year increased from 3% to 11%. It adds the new strategy did not create a hole in the finances either.
"The results speak for themselves," the fund comments. "We have drafted and implanted an efficient risk control and management system. This means each manager and the overall portfolio can only move within defined ranges with regard to tactical deviation from the strategic asset allocation policy. As we hoped and expected, the performance overall is close to the benchmark. Furthermore, a balanced mandate with just one manager was incredibly limiting. The revised strategy has created a pension fund with much more highly diversified and sophisticated portfolio. Our exposure to different asset classes is therefore enhanced and we make full use of a number of different asset management houses. Last, but certainly not least, the actual running costs of our asset management have been reduced," it continues.
Highlights and achievements
It could be quite easy for a scheme of this size to argue that it is not big enough to afford the kind of changes Thales Pensionskasse has introduced.
Indeed, somewhat to Thales's surprise, switching from a simple one manager, one mandate strategy to a complex, sophisticated, multi-manager multi-style which is both actively and passively managed has saved it money.
Size isn't everything but in this case it serves the members well. Here they have dedicated and committed fund that has completely overhauled its asset management in their interest. It has introduced a rigid but comprehensive performance measurement process that supports a tightly-controlled risk management philosophy.