Traditional multi-management firms have increased their offerings following calls for more fiduciary responsibility, as Helen Fowler reports
Pension fund trustees typically spend more than half their time deciding which managers to choose to handle their investments. Yet research shows that manager selection only contributes around 5-10% of the fund’s returns. Against this background, it is little wonder that the role of multi-managers is evolving to include a wider range of services, such as setting asset allocation, managing risk and checking the strength of counterparties, so that providers can continue to justify their existence.
Traditionally, a multi-manager’s job was to hunt out the top investment firms in a particular asset class, such as equities or bonds, and combine them in a client’s portfolio. Nowadays, multi-managers are increasingly likely to offer other services, known as fiduciary management or total plan outsourcing, allowing them to manage a pension fund’s entire investment portfolio and risk.
“There is a diminishing role for a straightforward multi-manager,” said Mercer client director of implemented investment solutions, Daniel Melley, “because pension funds are looking for more than picking-and-choosing managers. That’s just one piece of the puzzle. They want to know the right strategies.”
Fiduciary management allows an outside manager to manage a pension fund’s entire investment portfolio and risk. In contrast, multi-management allows a pension fund only to delegate the manager selection process. Fiduciary management is a relatively recent arrival in the UK, where it has been around for barely a couple of years. But UK trustees are quickly warming to a practice that has existed in the US for over a decade and in the Netherlands for three to four years.
Multi-managers are rising to the challenge, adapting their offerings to include extra services. As a result, the future looks increasingly uncertain for stand-alone multi-managers who can offer only manager selection.
Recent history has worked against them. Multi-managers have attracted controversy for the double whammy of poor performance and high fees. “They haven’t been doing that well, because of their inability to outperform other sectors,” said Cerulli Associates analyst, Yoon Ng. “And there is a stigma around them for charging really high fees.”
Multi-managers routinely charge clients more than 2% for their services, a level Ng described as ‘exorbitant’. And, although touted as defensive, the products lost an average 18% of their value in 2008, according to Cerulli.
At April this year, they were up barely half a percentage point. “They haven’t performed the way they were meant to do,” said Cerulli analyst, Jana Pristovsek.
Meanwhile, the financial crisis, which destroyed the value of so many pension fund portfolios, is driving the trend to fiduciary management. Aware of the consequences of getting decisions wrong, or faced with large deficits they must plug, trustees are no longer content simply to hand over manager selection.
As fiduciary management rises in popularity in the UK, the worlds of multi-management, investment consulting and fiduciary management are blending together.
Firms are yoking their multi-management operations together with their fiduciary businesses. FundQuest, the multi-management business owned by BNP Paribas with €36bn ($50.4bn) under management, is an example of a multi-manager that is evolving to include a wider set of services. In the past year the firm has begun working more closely with the fiduciary management arm of its French owner.
“At BNP Paribas, we have a team that does fiduciary management and increasingly we are working together,” said FundQuest UK’s chief executive, Antony John.
“Clients expect more than they did five years ago,” he said. “They expect much more in terms of detailed information and due diligence. And they expect a regularity of contact and reporting, since the internet has shortened time lines.”
“Multi-management has matured into an all-encompassing umbrella proposition,” said John. “There is to some extent a blurring of the lines between multi-management and consultancy.”
SEI is another multi-manager embracing fiduciary management. According to Ashish Kapur, head of institutional solutions for Europe, Middle East and Africa, who joined the firm from investment consultant Mercer several years ago, doing so is a natural extension of what the firm was already doing. “Slowly, multi-manager mandates have evolved to incorporate strategic advice, becoming fiduciary management,” said Kapur. “It’s been an evolution for us. We didn’t decide one day to do this.” SEI administers $380bn in mutual fund and pooled assets, while managing a further $149bn directly.
The firm still has a few clients for whom it provides only multi-management. “But even they involve some rebalancing and strategic work,” said Kapur. Offering strategic advice alongside multi-management allows SEI to go back to its roots in the 1980s, when it was a US investment consultant, before deciding there was an inherent conflict of interests between asset management and investment consultancy. It subsequently sold the consultancy business.
Russell Investments, which like SEI has evolved from a consulting background, has seen a similar evolution in client demand and the firm has had to spend time educating clients about the differences, and overlap, between total outsourcing solutions and straight-forward multi-management.
In May, Russell named Joseph Gelly practice leader of investment outsourcing, a new position developed to bring awareness to the firm’s clients about its outsourcing offerings.
“Within the market, there’s a great deal of confusion about what this means. We’ve always provided fiduciary coverage. That’s nothing new,” said Gelly.
What has changed now is an appetite for more fiduciary responsibility than in the past, he added. Clients have been asking Russell to take on more discretion. For example, they may ask the firm to run a separate account or advise on asset allocation weightings between alternative and traditional asset classes.
“Four to five years ago, very few $1bn plus plans looked at this. It’s amazing how much that’s changed,” he said.
The firm manages $140bn globally which includes outsourced assets ranging from a pure manager of manager service to more complex arrangements where officials offer advice on various pools of assets within an organisation.
Not surprisingly, investment consultants are shedding no tears over the demise of old-fashioned multi-management. Long accused of facing a conflict of interests if they offer multi-management as well as pure consulting, they can now justify offering fiduciary management by saying they are doing nothing different to just about every other firm in the investment business.
Investment consultant Mercer is another example of how multi-management is blurring with consultancy. The firm has begun offering implemented consulting, (another name for fiduciary management). Mercer’s Melley said: “We started offering multi-manager funds but over the years, we started wrapping investment advice with implementation, and we’ve pushed up to take physical control of the assets.”
“We are seeing the inevitable coming together of consulting and implementation,” said FundQuest’s John. “Consultants would argue with some justification this is what they’ve been doing anyway, so to formalise it is a natural progression.”
“People are asking for more than just multi-management, they’re saying it only solves part of the problem,” said Melley. Mercer has around 70 clients in the UK who have delegated investment decisions to the firm, with around £3bn in assets.
Manager selection should be almost the least of a pension trustee’s problems, according to Mercer’s Melley, making the pure multi-manager approach redundant. “If you are a pension fund you have a series of questions, starting with how to structure your asset allocation. The last thing you need to worry about is manager selection.”
The multi-management business at UBS Global Asset Management has also evolved into a much broader product. “We’ve been doing manager selection in pension funds for some time. We see fiduciary management as an extension of that market,” said Ritesh Bamania, head of the strategic investment advisory business in the UK at UBS GAM.
The firm is no longer judged simply on how pension fund assets perform against their benchmarks, but on changes in the funding status. Bamania joined the firm three years ago from Towers Perrin to set up the firm’s strategic investment advisory team in the UK. It has just under $1bn in assets in the fiduciary management business.
Even the business of manager selection is changing to adapt to a more risk-averse environment. “It’s not only about picking managers that perform well,” said Bamania at UBS. “It’s about understanding why they performed well and how they fit into a portfolio.”It’s really important to see if they have product diversification when you combine them.
As the multi-management business evolves to include services that were the traditional preserve of consultants, people are wondering whether there is still a role left for firms that offer only traditional multi-management.
“The multi-manager business model has not lost validity,” said SEI’s Kapur. “Some asset classes lend themselves very well to multi-management.” SEI typically blends together different investment styles for certain assets, such as large-cap equities. “We have eight or nine managers managing US equity funds, each of them is looking for something very different.”
A multi-manager can negotiate heavily with managers, using the advantage of great scale to secure cheaper fees. “It still makes sense. Not many trustees have the resources to be constantly monitoring all the managers they appoint,” said UBS’s Bamania.
Multi-management may be forced to adapt to its new environment, but it looks far from extinction.
Additional reporting by Raquel Pichardo-Allison
A number of pension schemes have been prompted to lock in gains with a move into bonds after the estimated deficit across FTSE 100 DB pension schemes improved by £36bn, over the 12 months ending 30 June last year, JLT Employment Benefits found.
HM Treasury has agreed in principle to give NEST a £329m contingent liability guarantee in the event of the master trust's wind up or closure.
AMP Capital has set up a dedicated team to help institutional investors, including pension funds, invest in infrastructure through direct equity allocations.