Widening the net for asset pooling
Until now, asset pooling has been an option largely reserved for the bigger players in the Dutch pensions market. David White reports on an initiative to bring the benefits to smaller funds.
For the benefits of asset pooling to outweigh the costs, there have to be sufficient poolable assets. The threshold asset size to make pooling worthwhile is considered to be around €5bn. This partly explains why only the largest Dutch corporate pension schemes such as Unilever, Nestlé and Shell have adopted or plan to adopt asset pooling strategies.Yet smaller pension funds are just as interested in the benefits of asset pooling, which include lower asset management costs and higher purchasing power for their investment managers
With their needs in mind, IMS, the UK-based independent multi-manager and manager of managers specialist, has teamed up with XS Investments, a Netherlands-based institutional investment firm, to promote a new asset pooling platform. Antony John, chief executive officer of IMS, explains: "The partnership with XS Investments gives us an opportunity to accelerate our move towards an asset pooling proposition for the Dutch market."
The aim, he says, is to provide a large enough platform for pooling to become worthwhile for smaller pension funds. "Effectively what we're doing is considering ourselves as a scheme of the size of the large Dutch corporate pension funds and using leverage in the same way," he says. "We are currently working on a pooling proposition whereby we can effectively split out from the master funds all the underlying managers to provide a ‘menu based' approach for pension schemes.
"This is significant because at the moment we have a US fund with four managers. If a client wants only a US growth fund, they may want only two of these four managers.
"That means that you've got to be a certain size to be able to access them on a segregated basis. Pooling gets round that quite comfortably.
"It also provides a host of potential options. A platform with 22 segregated accounts enables you to offer a range of mix and match strategies.
"This means you can consider lifestyle and LDI type solutions, as well as overlay type solutions like tactical asset allocation or being fully hedged into base currencies."
Asset pooling also offers, potentially, the benefits of tax transparency, he says. "Tax transparency is particularly significant for smaller pension funds. So many smaller schemes, particularly in continental Europe, are currently under-exposed to markets like the US because of withholding tax issues."
Yet transparency comes second, he adds. "We see this as a two phase process. The first phase is getting the pooling system itself into place and unbundling the underlying segregated accounts. The second, later phase, because of legalities, will be tax transparency."
Marlene Stam, director and co-founder of XS Investments, says the Dutch pension fund market is ripe for this kind of development: "For many pension funds the Dutch market is an increasingly complex environment, and we are seeing a growing tendency to outsource. We are also seeing an increased level of knowledge sharing and co-operation between pension funds."
This has created the conditions for an asset pooling initiative, Stam says. "We believe that our asset pooling initiative is a natural next step and addresses current needs of pension funds.
"Pension funds are looking for broader diversification for more specialist investment strategies. The intention behind the pooling platform is to include a number of very broad investments strategies including LDI, equities, bonds but also some innovative investment strategies to give pension funds basically the tools to create investment portfolios that meet their individual requirements.
"Although a handful of larger pension funds have already set up asset pooling initiatives, we believe that the smaller and mid-sized pension funds can also gain significant benefits.
"Our specific target market is the smaller and mid-sized pension funds. We believe that, with pooling, we can help them with a more efficient implementation of their external managers structure.
"There are quantitative advantages of economies of scale for administration, custody and asset management. But also important are qualitative advantages - enhancing pension funds' investment propositions by giving them the opportunity to access specialist managers and to implement proper diversification in the portfolio.
"It is in situations where pension funds do not have the size to diversify broadly that we see the real benefit of an asset pooling platform."
IMS expects to be able to launch the new platform early next year., says John. "We've done a lot of the legal and regulatory work already, and we've done a lot of work with the funds' boards, since these funds are controlled effectively by independent boards.
"We are in the process of undertaking a thorough review of custody and administration arrangements. We have to be absolutely convinced that the people we're going to contract with can do the pooling."