Poor levels of investment performance posted by some of the UK’s biggest names in asset management over the past two years has pushed a lot of pension fund money into the hands of smaller-scale asset managers, consultants say. Where pension funds were once run on a balanced basis, trustees are now reaching out for specialist managers, searching for pockets of untapped growth.
While growth in indexation is continuing among pension funds, it is no longer rising at the dramatic pace seen two years ago, says Paul Haines, investment partner at consulting actuaries Lane, Clark & Peacock. “It has stopped flowing all one way, but it’s still a net flow to indexation.”
Among asset managers, the main players in indexation are Legal & General, State Street Global Advisors and Barclays Global Investors, though Gartmore are also thought to be picking up indexing business, consultants say.
There is still a broad trend towards specialist arrangements, though Haines admitted it had not taken off to the extent most people had expected. “From our perspective, that trend looks set to continue – it is looking more and more similar to the US,” says Andrew Burchill of consultants Watson Wyatt.
Smaller managers in the UK now appear to be winning more pension fund business than was the case in the mid-1990s, consultants say. Disappointing performance from major names in pensions asset management such as Mercury, Schroders and Philips & Drew had pushed trustees more and more in the direction of smaller managers, says Haines.
Société Générale and Britannic are two examples of smaller managers succeeding in winning UK pensions investment business, consultants say. SocGen is seen as having built a good reputation for successful stock picking, while Lombard Odier also appears to have taken business away from the major asset managers.
Paul Black of Buck Consultants agrees that the dominance enjoyed by some of the larger managers during the past few years was now diminishing. “Philips & Drew, Gartmore and Schroder have all had their problems with performance for one reason or another,” he says. And because of their size and the often cumbersome decision-making processes, it was a long and difficult process for some of these managers to set about changing a strategy that was not working.
Among the major managers, Deutsche Asset Management has remained strong, turning out good investment performance figures, consultants say. Deutsche’s investment process appeared to clients to be solid and well thought-out. Similarly, Baillie Gifford was winning clients over with its coherent investment process.
Problems are continuing at some of the major managers, with Mercury giving the impression it is taking a long time to sort itself out in the wake of its acquisition by Merrill Lynch. One consultant says the manager appeared to have adopted a lower risk strategy in its investment approach as a way of now avoiding underperformance at all costs. But a stance like this was unlikely to lure many pensions clients, he said.
Philips & Drew is still seen in the process of a fundamental review following the departure of chief investment manager Tony Dye some months ago.
One of the main trends in pensions investment is towards specialist fund managed combined with passive managers to get the required level of risk, says Sally Bridgeland, head of investment research at consultants Bacon & Woodrow. She says using specialist fund managers is a challenge for pension fund trustees, because if they use this route, they then have to have a policy on risk and have to monitor their fund managers.
This is difficult when the manager is consciously and deliberately taking relatively high risks compared to a benchmark.
“There is more interest in hedge fund managers – it has grown and is likely to grow more,” says Burchill.
Haines acknowledges that it is often hard for trustees to keep abreast of the asset management scene, and there is a tendency to see safety in numbers by picking the biggest group.
Multi-management continues to be a popular option for some pension funds. Although the process adds another layer of expense, multi-managers argue it pays for itself by negating the need for the services of an investment consultant.
But Black sees the added expense as one reason why multi-management has not been more popular up to now.
Some managers have been more successful than others at picking up the defined contribution business up for grabs from pension schemes, says Burchill. “What differentiates them is really understanding the market and having good administration.”
While the uptake by companies of defined contribution has not been as great as many predicted, the method is becoming more popular with smaller companies, he says.

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