Strategically Speaking: Lyxor Asset Management
Fiduciary management is a relatively new concept for pension schemes outside the UK and the Netherlands. In the two countries the model has gained in popularity over the past decade. A key driver of the trend towards full or partial delegation is the sheer number of small pension schemes. Many struggle to meet increasing regulatory requirements and management standards, which often makes the fiduciary option not only rational but also convenient.
In the rest of Europe, managing occupational pension schemes is primarily the job of trustees affiliated to corporates or trade associations. Investment advice fulfils a huge support role, but pension schemes have been slow to take up full fiduciary services offered by Anglo-American and Dutch firms.
However, fiduciary management is a potential solution to the problems of countless pension funds in Europe. From that perspective, it is no surprise to see Lyxor Asset Management raise its efforts in this area. Last June, the firm launched the Lyxor Enhanced Architecture Program (LEAP), a product that combines the range of Lyxor’s capabilities into a full fiduciary offering.
Through LEAP, pension schemes can access Lyxor’s asset management, risk management and reporting services. LEAP is a modular programme, in the sense that clients can choose the services they need. As such, it is flexible and allows clients to shape their fiduciary relationship with Lyxor as they see fit. One key feature is the possibility to link with other asset managers, if clients require a specific investment product that Lyxor does not provide.
Amber Kizilbash, Lyxor’s head of sales and client strategy, recounts how the idea for LEAP was conceived on the back of the €2.5bn deal that Lyxor signed with Engie, a French energy company. The deal, signed in January 2016, was Lyxor’s largest to date, and took a long time to structure, says Kizilbash. Lyxor took charge of managing the whole of the firm’s pension liabilities, through an “open-architecture, multi-fund investment solution”.
“We realised the deal with Engie consisted of a full fiduciary offering, built out of a modular structure, making use of all the modules that we had built over the years,” she says.
“The reason the time was right to launch the full fiduciary offering, which takes into account all the model we’d developed over the years, is that the context was very specific,” says Kizilbash. “The low interest rate environment has endured for too long, and is resulting in massive shortfalls for pension funds. The inflation scenario brings low yields in equities and real estate. Regulation is becoming more complex.”
LEAP represents a further development of Lyxor’s managed account expertise and an attempt to engage with a wider range of clients. So far, the brand has been associated mainly with the hedge fund world. The decision to enter the fiduciary management space should expand the firm’s reach beyond that world. Lyxor could then establish itself as a mainstream asset manager, one which any pension scheme can work with, whatever its size or expertise.
“In this context, we feel it is necessary for pension schemes to have someone that understands your problems and comes up with a solution that enhances their governance and risk management, as well as helping them achieve a cost reduction, which will eventually lead to greater efficiency and therefore better results for members”, says Kizilbash.
The keywords are ‘infrastructure’ and ‘architecture’. The firm can offer just the basic infrastructure, such as reporting and risk management services. Kizilbash says, thanks to LEAP pension schemes can achieve up to 40% savings on these areas of asset management.
Lyxor also offers a more complex architecture, which includes traditional and alternative asset allocation.
“When clients need us to help them achieve their investment objective, we offer a modular and comprehensive suite of performance engines,” she says. “But this is an open architecture, because the client is not dependent on us. They can source asset managers whom they think are better than us.”
Another key feature of LEAP is that each pension scheme has a whole team of experts at their disposal. The firm uses asset pooling in all facets of asset management areas, but dedicated professionals take care of each individual scheme separately. Clients therefore will not just deal with salespeople.
Kizilbash says that, because of the concentrated efforts required to serve LEAP clients properly, the firm is “very selective” in the kinds of deals it does. “Our objective is not to just amass assets. You can imagine that we cannot do 50 deals like that, where we provide excellence and make sure our clients feel the power and the benefits of what we’re proposing.”
Lyxor initially found about 280 potential European clients, and met as many as 60 in the first few months LEAP was operating. Those meetings reinforced the firm’s belief in its proposition. “Many of the medium to small-sized schemes are two or three person teams, and they are constrained in what they can do”, says Kizilbash. On the other hand, large corporates often have to deal with a myriad of small legacy schemes, she adds.
“I spoke to a company in Germany that mentioned 63 different schemes, across multiple countries, some of which had as little as €2m of assets. You can imagine the costs being generated. Often there are multiple asset management agreements in place, and it’s a waste of money and time. The companies are not leveraging their size to negotiate better.”
For a fiduciary management fee, which includes a performance element, Lyxor offers to do that and to meet the client’s needs. The company is targeting primarily European pension schemes. However, it has made some strides in Asia and the US, and has had discussions with other asset managers about applying the platform to their operations.
This is a bold move by Lyxor. The fiduciary management market is facing pressures in the UK and the Netherlands, where it is already established. Regulators are raising concerns about fiduciary manager’s business models.
The UK’s Financial Conduct Authority is scrutinising traditional consultants that offer fiduciary services to assess their conflict of interests. The value for money offered by fiduciary managers is also being questioned.
However, Kizilbash is convinced that this is the right time and the right way for Lyxor to become a fully-fledged fiduciary manager. “There are worthy competitors in this space. Our role is to put the best of our expertise at the disposal of our clients. We want to design something that empowers pension schemes.”