Pension funds want the benefits and risk diversification of a multi-manager approach without the administration that goes with it, says Patrick Disney
Multi-manager asset management structures are an established part of the UK pension fund market. The concept can encapsulate anything from two balanced managers – a structure that is adopted by a number of medium-sized pension funds in the UK – to the approach used by SEI Investments, which may involve the use of several specialist investment managers.
We believe our multi-manager solution offers pension fund providers substantial advantages over both the traditional balanced fund in terms of meeting pension funds’ investment performance objectives as well as providing superior risk management.
More importantly, it absolves pension funds and their trustees from most – if not all – of the monitoring and administrative chores associated with overseeing complicated multi-manager structures. Our outsourced pension management process provides an integrated approach that combines superior investment management with first- class administration.
Consider some problems associated with the traditional balanced approach as far as asset management is concerned. It is extremely unlikely, for example, that any traditional balanced fund manager can bring a uniform standard of excellence to bear on all segments of the investment universe, although it may exhibit a consistent level of outstanding performance in some areas.
Moreover, specific investment styles move in and out of fashion. Over much of the second half of the 1990s, for example, large cap growth has been in the ascendant. This is good news for pension schemes that have employed specialist managers in this field. But for those that have opted for managers with a value bias investment performance has often been very disappointing.
Blending a range of specialist managers with different style attributes – as we do at SEI – can mitigate both of these problems.
But multi-manager and multi-style structures can entail a plethora of additional costs and demand expertise that is well beyond most pension schemes. This is especially the case as far as managing and overseeing such structures on an ongonig basis is concerned.
Consultants can play a role – especially when it comes to establishing initial asset allocations and identifying suitable managers. Thereafter, however, the fund will almost certainly be on its own. It will have to assume the responsibility for monitoring manager performance, ensure that this conforms with overall objectives, and – if necessary – take remedial action such as firing managers and hiring replacements.
A more serious shortcoming is that this solution may only be relevant to larger pension schemes. Even if they can devote the necessary resources to overseeing and administering a multi-manager, multi-style fund, smaller pension funds will face other constraints. The most important in this respect is meeting the minimum investment thresholds required by specialist managers.
SEI’s manager of managers asset management programme overcomes all these problems. By mandating the best asset class and style-specific specialists to manage specific portfolios SEI provides the building blocks for tailored pension fund solutions across the size spectrum. Size no longer becomes an issue. Exploiting the opportunities provided by outsourcing means that we can offer the same level of performance and service to pension fund clients irrespective of the size of the investment mandate.
The programme has been used successfully to manage money for a wide range of institutional and high net worth clients in the US and other jurisdictions for many years. At the end of 1999 we had more than $65bn of funds under management, making us a global leader in this field. During the coming year SEI will be offering the solution to pension funds in the UK and Europe through our London office as well as our joint venture with Credit Commercial de France (CCF).
The essence of the SEI approach is that pension fund trustees assign overall investment discretion for meeting the objectives of a pension fund to a single investment manager. We then take on the responsibility of selecting, hiring, monitoring and firing specialist fund managers, according to the specific objectives of the fund. In addition, we also provide comprehensive and state-of-the-art reporting facilities that enable trustees and sponsors to be kept up to date about plan developments.
The advantages of this approach are obvious. Pension funds – or, perhaps more appropriately, pension fund sponsors and trustees – no longer have to concern themselves with day-to-day management or go to the expense of establishing an in-house capability to do this for them. Instead, they can rely on the expertise of specialists, enabling them to devote more time and resources to managing their own businesses, confident that the aims and objectives of the pension scheme will be realised. SEI thus acts as a powerful liberating force for all companies faced with the problems posed by running a pension scheme.
All this assumes, of course, that manager of manager structures really are up to the task. We have no doubts on this point. We have long-established investment philosophies, procedures and disciplines that have enabled us to provide our clients with the desired level of investment performance on a very cost-efficient basis.
The SEI manager of managers process is designed to produce stable, consistent returns within a defined performance range relative to a benchmark. The design of this process combines the risk attributes of index-like investment with the benefit of active portfolio management – the opportunity to produce returns that are better than comparable indices.
Four key principles underpin this process: asset allocation, portfolio structure, manager selection and ‘managing the managers’.
Few would question the importance of asset allocation within the investment process. But asset allocation is only the start. The successful conclusion of the process lies in the portfolio structure itself.
This invariably involves a meticulous diversification of assets to maximise the risk/ return characteristics of the portfolio. Our investment research has resulted in the design of portfolio structures that not only access the rewards of individual financial segments, but substantially reduce the risk associated with inadequate diversification.
To implement these strategies we use around 40 investment managers selected from a global universe of 15,000. We use a plethora of quantitative and qualitative procedures, the aim being to select the best managers in each asset or style category.
The search process involves a manager’s performance against a benchmark relevant to its investment style. In addition to examining absolute returns, we also examine the consistency of returns across market cycles.
We have a preference for specialist managers that have a clearly defined investment philosophy and style – such as growth or value, or large or small company investing – that have been consistently applied over a number of years. We also look for stable, well-managed organisations that have the ability to attract and retain outstanding investment management talent.
The subsequent ‘managing of managers’ is perhaps the most distinctive element of our approach to managing money. Portfolios have to be managed on a continual basis. They must be able to deal successfully with both market changes that can cause asset allocation targets to drift from their original positions and result in unintended risk and changing client objectives.
We adopt a two-step process of continuous portfolio management. First, the asset mix is systematically rebalanced to help reduce risk and keep investment strategy on track.
Then, through ongoing monitoring and management reviews, we ensure that our managers’ investment styles and performance remain consistent with the objectives of the investment portfolio. Our state-of-the-art technology allows us to monitor managers every day – checking portfolio holdings and trades, and ensuring the ‘purity’ of the investment portfolio. Managers who deviate from their philosophy or fail to achieve stated goals are replaced.
These philosophies and processes have worked well in the US for many years. We are confident that over the new decade an increasing number of European and UK clients will also experience the advantages that our unique approach brings to managing pension fund assets both in terms of superior performance and more efficient administration.
Patrick Disney is managing director institutional at SEI (Europe) Ltd in London