There are many ways to skin a cat but for pension funds the investment aim is often to find an easy, one-stop service offering high returns with low volatility. Multi-management, where a company picks and monitors fund managers to create a portfolio for its clients, is seeing increased demand as Dutch pension funds look across insurance contracts, multi-management, balanced and ‘new’ balanced offerings trying to decide which is most appropriate for their needs.
After a slow start in the mid- to late-1990s, multi-management as a concept - usually for institutional clients by providing mandates to external investment managers rather than offering a fund of funds - has gradually gained ground. Russell Investment Group was the first and has operated in the Netherlands for eight years.
It is now facing competition from the asset management arms of investment backs, such as Goldman Sachs and potentially UBS; other specialists, for example SEI Investments; pension funds with a third-party service, MN Services and TKP Pensioen; other financial services providers, like Axa Investment Management; or consultants.
The reason for the interest from multi-managers is the expectation that as a concept it is more widely understood now and pension funds are willing to invest. Johan Cras, managing director of Russell’s Dutch operations, says it had doubled its assets over each of the past three years to €2bn. “And the size of our average mandate is increasing, which is showing either a larger part of a pension fund is doing this or larger pension funds are outsourcing.”
Cras says Russell’s traditional business is for larger pension funds but over the past three years it has sold a larger share to medium and small pension funds. However, smaller schemes have specific needs – they want balanced investing and need intensive reporting and help meeting the regulator’s requirements on that front. “We stand by their side to integrate pensions solution and are more than an investment manager solution, we will work with other partners.”
But, he says, there was not one simple solution to regulatory rules, such as the planned International Accounting Standard 19 and FTK. These changes, alongside questions about hedge funds and other alternative investments, matching the duration of liabilities and investments and structural changes to a pension fund, for example moving from a defined benefit to a defined contribution scheme or removing indexation, meant it was hard to predict how pension funds would react. “These are big challenges and pension funds are looking for an integrated service.”
Cras says that effectively most large Dutch pension funds are multi-managers themselves “so it is a question of outsourcing” to us, to balanced mandates or another consolidated service provider. “Over next two years 50-70% of total pension fund assets will go this way.”
Bart Heenk, head of SEI Investments, a US multi-manager company, which is about to open an office in the Netherlands, says there were few schemes with more than about €150m but demand was from across the board, although the reasons were different. “Very large pension fund use us to build expertise then will do this themselves, which is fine. Smaller schemes with less than €1bn have not much in-house expertise. This is fertile ground for us.”
Pepijn Heins, managing director of institutional business development in the Netherlands at Goldman Sachs AM, says most demand for multi-management (also called fiduciary management) was from €500m to €3bn. The key reason for picking multi-managers was because “not every manager is good at everything under a balanced mandate. So pension fund are looking at doing the research in-house and hiring managers or going to multi-management where they do the asset allocation, risk monitoring and hiring in a one-stop shop”.
Heenk agrees that the market was ready for the idea. “The last few years has prepared pension funds for more professional solutions; previously the Dutch were self-confident of their own ability. Smaller pension funds had given global mandates to domestic managers, but now are faced with past performance that is not particularly impressive and realise no one can be experts at everything.
“The larger schemes are replacing in-house with external providers but the question of how to select and integrate them. A large number of external fund managers require consolidation of net asset values and data settings. And once selected managers are hard to change, alongside questions of how long to live with poor performance. It can take six to nine months to notice and change them versus using a multi-manager which can change the underlying managers in days. We do not sell products but act as an adviser to help with issues.”
Cras says the success of multi-management investment was largely driven by greater emphasis on governance issues by pension funds. There were four issues that pension fund boards are re-focusing on, he says. First, what they do and what can be outsourced. Second, is a re-evaluation of risks: “When the market is up 30% they are not bothered if the manager does 29-31% but now it has turned down basis points are more important.”
Third, is pension funds’ realisation that multi-management not only select and control managers but offer transition management, equitisation (avoiding the use of cash in the portfolio) and can help with futures and rebalancing portfolios. Fourth, and lastly, multi-national companies are increasingly interested in more co-ordination and transparency in cross-border solutions.
But others are less sure that multi-management would take off as rapidly as predicted by the managers themselves. Hans Braker, director at Aon Consulting, says pension funds were looking at investment managers from outside the Netherlands and were now encountering multi-management. “They are considering multi-management but I do not see a big trend there. The very large schemes are choosing managers themselves.”
Frits Bosch, managing director of Bureau Bosch, a Dutch consultancy, says that the main idea was a comeback of balanced mandate in a new format: to offer everything from vanilla equity and bond fund management to diversified alternatives in one provider. He says fiduciary or multi-management services integrate risk management and liability to address problems pension fund were facing in matching duration. “I not see the difference between new balanced and multi-management, although there is the advantage of flexibility.”
Heenk admits that there are two layers of fees but says SEI offsets these as much as possible and added value. Cras says: “Providers realise multi-management is more than bringing money to a market but monitoring this money and providing access. Fees are not going down but remain less than 1%, depends on the asset class, for example Japanese equities are nearer 90bps but European fixed income is much less than that.”
Heins says GSAM used performance related fees, of about 25% with a matched hurdle and watermark, so its interests were aligned with the pension fund but its standard management fee was only a few basis points. On conflicts of interest, Heins says GSAM has a Chinese wall from derivative or swaps brokers and advised clients on managers outside GSAM and did not pick their own group unless specifically requested to.
SEI and Russell have also tried to avoid conflicts of interest and do not have an internal fund management arm or offer consultancy services. Cras says: “For pension funds it should be very clean. And for fund managers we are non-threatening, as we have no commercial distribution subsidiaries.” Russell has a tie in the Netherlands with Robeco’s asset management arm for retail investors.
With the enormous changes underway in the Dutch pension fund market, multi-managers are finding some success in their services and the number of providers is growing rapidly.