One of the largest and more sophisticated fund management markets in the world, the strongly-equity oriented UK market, has been providing its highly developed pension fund industry with a broad a range on investment vehicles for a long time.
Whether pension funds opt to invest in segregated accounts or choose a pooled fund vehicle, the current volatility of the markets, has had a negative impact on pension fund returns.
Last’s years poor performance continued during the first months of 2001. According to data by performance measurer CAPS related to the first quarter of the year, pooled pension funds in the UK showed negative average returns, with UK pooled mixed with property funds returning a median of –7.2, the lowest start to a calendar year since1974. Over the year to the end of March the median mixed with property funds returned –10.3%, with only one manager, J Rothschild (GAM), achieving a positive return of 6.4%.
Since many UK pension funds invest in pooled funds rather than in segregated portfolios
The CAPS quarterly survey currently covers 88 different asset managers managing £194bn (e318bn) in pooled funds, both balance and specialist. According to them, as a result of more than a year of market volatility, the predominantly positive returns of UK pension funds over the past three years have been eroded. The median annual return on mixed assets with property funds is now 3.3%, although over the long term the results look better, with a five-year period median of 9.9% and a 10-year median of 11.1% per annum.
Pooled vehicles have been a popular choice among UK pension funds instead using segregated portfolios. Looking at the table we see that the pooled funds that have attracted the largest number of UK pension assets at the end of March were two index-tracking funds investing in UK equities. Pooled index-tracking funds, especially those under an insurance company umbrella, have been the favourite product range for marketing index-tracking services to new clients chosen by UK fund managers. Top of the ranking in terms of assets under management is the Legal & General UK Equity Index fund with assets of £29.5bn. During the first quarter of the year the fund returned –8.3% with s median return of 2% for the past three years and 11% over the past five. In second position, the BGI Aquila Life UK, accumulated £15.2bn pension fund assets at the end of March and achieved a –8.5% return during this first quarter.
With more DC schemes being set up for new employees and particularly the arrival of stakeholder pensions, there is increasing demand for specific investment vehicles, whether they are pooled or mutual funds. A large number of providers have launched products to meet the significant degree of choice offered by trustees to DC scheme members. Multi-asset management still dominates the investment strategies of DC plans, especially among smaller schemes that cannot afford specialist managers.
Currently multi-manager and funds of funds structures are also gaining importance among institutional UK pension funds, with new breaking into the market during in the recent past. These structures allow schemes to access specialist managers in a practical and cost-effective way. Although there is not a general rule on the type of funds used in multi-manager structures, Dublin-based open-ended investment companies (OEICs) seem to be the most common choice, although some firms have opted for life funds or authorised unit trust.
The increase interest for this type of third party products is accelerating the penetration of the ‘open architecture’ fund management approach, bringing significant changes to fund distribution and administration. In this sense, since individual investment choices become more common and sophisticated in DC schemes, marketing and branding of investment fund products is growing significantly.
The introduction of stakeholder pensions has also had an impact with the 1% management fee requirement forcing managers to review and cut administrations costs and revisit the passive/active management debate.
Interest among overseas institutional investors in UK-domiciled funds accelerated with the introduction of OIECS, which have a simpler tax and pricing structure than unit trusts. However, purchases from foreign investors have not been as good as expected , since these institutions can find similar Dublin or Luxembourg-based products.