The shift to defined contribution (DC) schemes across Europe is likely to fuel the demand for multi manager service. Although defined benefit (DB) schemes are in some respects simpler for multi managers to run, because they have to deal with fewer points of contact, the market is changing and demand for multi- managers for DC schemes is increasing.
Nick Wyld, director at Stamford Associates, the multi manager investment consultancy, says multi-managers can reduce the investment risk of DC schemes while increasing returns. “The employee has nowhere to turn if the pot of money is not large enough. This means that investment risk is much more critical for DC schemes than it is for DB schemes, where the employer has more options. The whole rationale for putting together multi-manager packages is that you can actually appoint managers who have an appetite for risk and who you would not use on an isolated basis, but combined with three or four other managers, can provide a very interesting risk averse product with huge scope to add value.”
Haneen Rabie, senior analyst at research firm Cerulli Associates, says: “Multi-manager products are low risk products and most don’t claim to provide aggressive out performance but they do attempt to mitigate manager risk, an aspect that is appropriate for DC pension schemes.’
Tony Earnshaw, managing director of Northern Trust Global Advisors (NTGA) and chairman of the European multi-manager committee, says: “All the arguments that are applied for the DB market are equally valid for the DC market. The exposure to style risk with a single manager is still a risk in DC schemes, the only difference being that the risk is borne by the member rather than the trustees. In a multi-manager approach, you control the risk by using managers for what they are good at and using their competition for the things they are not so good at.”
The UK Myners report, which advised that trustees must properly structure, select, monitor and replace managers, has also increased interest in multi-management.
Roger Whittaker, UK sales director at Frank Russell, says: “Following Myners, fewer trustees are happy to be accountable for picking a manager in isolation. They are much happier about picking a multi manager where they have outsourced that responsibility.”
Multi-management tends to be more popular with smaller pension schemes, as the larger schemes above £500m (E782m) tend to have easier access to the best mix of managers as they can afford the high fee charges. Smaller clients (anything below £100m) cannot easily access that investment expertise because of the high costs involved.
Derrick Dunne, co-chief executive officer at Attica Multi Managers, says: “Ideally the multi manager should bring investors the best talent in each and every asset class and continue to bring that best talent, so we change managers if we feel that we need to. A single investor would need around three quarters of a billion pounds to gain access to those managers, so it is really the practice that the very large DB pension schemes have been employing for many years.”
NTGA’s Earnshaw says: “We have always tended to market towards the smaller/medium schemes, but that is only because the bigger the scheme, the more likely they were to do it themselves. I think you have to be very big and well resourced to do what we do, but in the case of a big DC scheme it is still a lot of individual member posts, so the argument about size goes away to some extent.”
Stephen Delo, UK marketing director at Escher Investments, says: “With the general drive towards specialist management, the major investment consultancies now recommend their larger clients to use a team of different specialist managers. Smaller clients can’t access that because the best specialist managers will normally manage on a segregated account basis and they will have minimum account sizes and fees. So schemes of between £60m and £70m have little or no chance of getting access to the best mix of managers.
“If that is the right thinking for large schemes, it has got to be the right thinking for small schemes and the only way they can access that thinking is through a multi manager. So that is a powerful driver.”
Larger schemes tend to get economies of scale on their fund management arrangement and a multi- manager becomes less attractive on financial grounds. Tony Earnshaw says: ‘We have always tended to market towards the smaller end, but that is only really because the bigger the scheme, the more likely they are to do it themselves. But however big a DC scheme is, it is still a lot of individual member pots.”
Although costs remain high for the smaller pension schemes, there is increasing pressure to drive down those fees, and the multi-manager approach will increasingly become a more affordable option for pension plans. Multi-managers can help reduce risks by keeping tabs on any movements of managers or changes to strategy within the appointed investment houses.
Neil Jenkins, managing director of AXA Multimanager, says: “As the multi-manager forms another level of intermediation, there are small costs involved, but, having said that, they already exist with an investment consultant. They are already included in a pension fund cost structure and the multi-manager is to a large degree carrying out the role of a consultant so one is replacing one cost with another rather than increasing it.”
Increased costs are offset by reduced risk and enhanced investment performance through diversification of asset allocation. But over-diversification can swing results in the opposite direction and increase the possibility of the fund becoming an index tracker.
Andrew Kirton, head of UK investment consulting at Mercer, agrees: “It is a risk, that the more managers you have in a multi-manager outfit, the more likely it is that you will achieve an index performance. It is all about balance and what most services aim to do is to have a style neutral overall character to the funds that they are running. We can also run an analysis as to what the combination looks like in terms of its risk profile, the kind of risk relative to the index and to what extent the allocation of assets looks different from the index that managers are trying to beat.”
But Wyld points out: “In the case of DC schemes, we are talking about individual pots per member – of course they are going to be more concerned about things like capital preservation and maximum return and less concerned about whether they add a little value compared to the benchmark. Frankly, the benchmark is not going to pay their pension, it is what they have when they retire that will allow them to buy annuity.”
Investment consultants add another dimension to the multi-manager concept, in particular those that have joined forces with a multi manager of their choice, to offer clients a combined package. Mercer for example, argues that small and mid-sized pension funds should take advantage of the Mercer 360 service, to which Attica acts as sub-adviser and in turn uses Mercer’s manager research service.
However, Kirton argues that conflicts of interest are avoided. “Any amounts that paid to Mercer 360 are excluded for the purposes of calculating the advisory fee that we have with Attica. There is nothing to stop us using other multi-managers. Clients form a separate contract with Attica, they are not bound in and we are obligated by the FSA to annually review and confirm evidence to clients that Attica remains a suitable choice.”
So what options and challenges lie in store for multi-managers? The demand for multi-manager schemes was also seen in the decision by some managers to adopt open architecture for the stakeholder pension product being offered to corporate pension schemes.
Open architecture is seen as becoming the norm for stakeholder with guest fund managers offered alongside the host’s own funds. This approach also allows strongly branded firms with limited active management resources to secure extra market share as product distributors.
Delo at Escher Investments says: “Fund management structures tend to be sold rather than demanded. In the UK not only is it being marketed very well, but also the conditions are right for trustees to start demanding it, because they need that sort of structure to comply with legislative requirements. So that makes it a powerful market place.”
AXA’s Jenkins concludes: “A multi- manager product is almost by definition a product that will use other investment firms’ products as well as potentially your own. The challenge is to be able to position the business so that you don’t feel that, if you win a multi-manager product mandate, all you are doing is replacing a mandate you might have won yourself.”