Changing views in the pensions industry on the role of active management within portfolios has led to a rise in new balanced mandates, say consultants. But is it really best to use a single investment house for such a wide variety of different assets?
Anthony Ashton, head of global client development at Hewitt Associates in London, says there has been a realisation in the investment industry that in the past, some active management has been closet index tracking.
“Pension funds are seeking truly active management,” he says. “They don’t want to pay active management fees for something that tracks the index. We’re not seeing a shift towards indexation but a realisation that passive management can be bought very cheaply,” he says. If there is a need for indexation, pension funds are seeing that they can buy it separately from active.
“People aren’t just looking at equities and bonds,” says Jane Welsh, senior investment consultant in manager research at Watson Wyatt. “They’re looking at a whole range of strategies,” such as currency, overlays, tactical asset allocation and private equity.
“They are broadening their strategies, and it’s also about finding people who can add value in those areas,” she says.
Ashton says unconstrained portfolios - where performance is not related to a benchmark - has proved very popular. “So we are seeing greater comfort in moving away from an index or benchmark,” he says.
Fees for active management are rising, Ashton notes, although for pension funds investment management need not be more expensive than before. “We have seen a trend away from the big multi-asset houses towards more specialist boutiques over the last ten to 15 years,” he says.
There has also been an increase in new balanced mandates, he says, because people are realising that asset allocation ought, in the medium to long-term, to be active.
This is not a reversion to the old type of balanced mandates that used to be on offer, he points out. It arises out of pension funds’ need to have experts with the right resources and incentives to determine where the most inefficient markets are currently, and generally using their skills to profit from market timing.
“How do you balance those decisions?” he asks. “Bringing them together makes sense conceptually.” When an asset manager is dealing with a balanced mandate, they are able to judge when is a good time to invest in a particular asset class, as well as seeing whether there is an opportunity for active management within that.
The new type of balanced plays to the strengths of the large asset management houses, says Ashton. “Some of the big houses are putting a lot of resources into beefing up asset allocation capability and resources.”
These are the same firms that used to manage the type of balanced mandates that subsequently fell into disrepute. The problem was that the managers simply followed peer groups in terms of asset allocation, and stopped making significant asset allocation decisions.
Welsh says Watson Wyatt sees managers emerging in the new balanced arena that traditionally serves high net worth individuals. “They are prepared to change their asset mix depending on their view of the market…they may be willing to consider other asset classes – gold, for example.”
But she questions whether one firm can really offer all of these types of asset management well. Very few of them outsource to other specialist managers.
“The jury’s still out on whether one can offer all these elements,” she says.