The first choice for people in pensions

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Gimme some of that TLC
Trustees are under no illusions about the importance of selecting a fund manager who will produce results. Arveen Luthra reports

Though experts cite the main reason for deciding on a fund manager as performance, they agree that there are many other factors that come into the mix in the hiring and firing of fund managers. With an exhaustive list of criteria that includes investment style and strategy, stock selection, good client-manager relationships, the provision of administrative and client services, a good range of funds and a proven performance track record, fund managers have a far from easy task in the rush to clinch deals in an increasingly competitive industry.

Tom Harker, director of business development at HSBC Asset Management, asserts that the issues that are important to the individual scheme are the ultimate deciding factors in picking or deserting one fund manager over another. He says: “To some, having a strong parent company or a well capitalised balance sheet is important, to others it’s the brand name and the investment process that matter. Any survey that is undertaken will throw up a complete range and raft of results depending on the individuals and trustees involved.”

Kevin Coomber, investment consulting director at JLT Benefit Solutions, gives an insight into the consultants’ angle. “The sort of thing we would look for to start with is the style of management that the client wants, whether that’s active or passive. This automatically tells us about the performance they are looking for. We would then home in on the geographical locations, the size of the organisation and any ownership issues,” he says.

The motives for sacking a fund manager are just as varied, though inevitably they start with poor performance, and can encompass a whole range of points. Charles Farquhason, head of the institutional client division at Merrill Lynch Investment Managers, believes the reasons for dismissal fall into two different categories. The first is around the performance or service that the individual manager produces, and the second around the investment strategy and investment policy that the pension funds in particular choose to adopt.

An example is the recent trend from multi-assets managers to specialist managers. “If the client wants to deal with bonds, then they will pick the best bond manager, but if they want to to be in different sorts of equity, they will pick a range of equity managers. So in some cases you might be in the right place at the right time, or the wrong place at the wrong time,” says Farquhason.

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Farquhason’s point is borne out by Essex County Council’s recent decision to switch fund managers, resulting in Schroders losing a £450m global balanced mandate. Essex County split the fund into three, awarding Legal & General Investment Management a £250m passive UK equity mandate, Capital International a £150m active overseas equity mandate, and Henderson Global Investors a £100m active global fixed income mandate.

Their previous structure was significantly dominated by balanced managers, so they decided to bring in specialist managers to replace Schroders. Keith Neale, county treasurer at Essex county council, explains the reasons for the move: “We had a review of the structure of the fund and we made some significant changes to asset allocation, and in the light of that we changed our management structure, to bring in specialist managers.”

Neale goes on to identify what the key criteria were when selecting the new managers: “We have selected a benchmark specific to our needs. Amongst the criteria, we wanted managers who were best equipped to deal with the assets allocation benchmark that we chose, and who have the depth of experience and expertise that is needed to deliver.”

In the past, one of the reasons pension funds have stayed put with their manager is because of loyalty, but Coomber explains that times have changed. “In today’s world, I don’t see it happen that often. I have seen managers in place for 25 years or more, and its usually been because of another company connection, but just as we can move our mortgages and bank accounts quickly, the same is true for trustees and their investment and pension funds.”

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Though the cost of moving managers is clearly a consideration to switching, even a deterrent, it might be worth the cost in the short-term, for the scheme’s overall benefit in the long-term. Effectively you have to bite the bullet if you’ve lost confidence in your manager and have realised that it’s time to move.

Coomber explains: “The cost is definitely something that needs to be taken into account for the typical defined benefit scheme. You might be looking at a one off cost spread over maybe three to five years. A poor manger will lose you that year in year out.”

Harker agrees, saying: “The cost is definitely a deterrent against changing managers, but I think that consultants are pretty good now at transition management. There are obviously specialist transition managers, who can manage the transfer of one or several incumbent managers to new managers that will keep the cost down, but nonetheless, it is a major consideration.”

Aside from cost, one of the most important factors in selecting a fund manager is client care. Good chemistry between the fund manager and the client often plays a vital role in the ongoing relationship between the two. If this relationship turns sour, then this can be a reason for parting company.

HSBC’s Harker thinks that emphasis on this area should never be overlooked, saying: “If you manage the relationship well and there is chemistry, I think you generate a lot of loyalty. If you don’t achieve that chemistry with the client, the slightest sign of trouble will mean that the client will look elsewhere, despite the cost involved in changing investment managers.”

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Coomber says: “It has often been said that there are three aspects that come out of fund management operation: basic client care, reporting and the fund management operation.” He says that for many years, the general client care and reporting aspects used to be done by the custodian, and if not done adequately the fund managers would get sacked for something that was not their fault.

Coomber believes that the industry got it right when it moved towards improving its client services. The emergence of in-house client care teams comprised of staff who at some point in their careers were involved with the fund management side and now specialise in customer communication. This means that the fund managers can concentrate on what they’re good at – putting together portfolios. “We started to see this happen ten years back, but over the last five years, it really has picked up pace and just about everybody is in that area,” he says.

Harker concurs, asserting: “We are in a very competitive area. Fund managers have realised that they are in a certain business and they have to provide a certain service. Ten or fifteen years ago, they could just rely on delivery, and not have to do much more, but I don’t think that is good enough nowadays. We live in a different culture and that despite investment return, good or bad, I think you’ve got to look after the client, backing up those returns with good administration and good service. The client has got to be treated better than in the past.”

– Pensions Age July 2001 –

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