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• Most fund managers specialise in one particular asset class.
• A fund manager’s risk profile is particularly important for employers trying to minimise the volatility of pension investments.
• An intermediary or consultant can help employers and trustees identify a manager that best suits the needs of their scheme.
Choosing the right fund manager is a crucial factor in pension scheme investment, says Nicola Sullivan
To get the best value from a fund manager, employers need to consider a number of factors, including its ability to manage investment risk and to meet a pension scheme’s investment goals. Fund managers are usually appointed to handle pension investments for final salary or trust-based defined contribution (DC) schemes. With contract-based DC plans, fund managers have a direct relationship with individual investors, so employers must make responsible choices on asset management firms. Typically, a fund manager will specialise in one particular asset class.
Ian Bailey, a principal at Aon Hewitt, says: “A UK equity fund manager is trying to make money for trustees by finding the right UK equities to hold, whereas a liability-driven investment manager will be trying to minimise risks within the fund. There are people that manage more than one [asset class], but we tend to find the best skills lie with those that specialise. The investment world is a complicated place, so it is quite hard for one individual or one team within a firm to really understand their own market, let alone every market out there.”
Employers should also ensure a fund manager suits their scheme’s investment strategy, whether delivering a single default fund or utilising diversified growth funds to reduce volatility. Richard Higginson, head of reward at Towry, says: “I would expect a fund manager to stick to the investment strategy [it] specified at the outset. The notion of a fund manager saying ‘I am going to sell this and buy that because I think tomorrow the market is going to turn upwards’ is a very dangerous way of running pensions.”
Managing volatility and achieving smooth returns is likely to be a priority for most pension managers. Jonathan Lipkin, head of research at the Investment Management Association, says: “Some managers may offer products that try to benchmark against cash or an inflation target to minimise volatility for the end investor, and that is seen in diversified growth funds. The aim is not to try to outperform the stock market index, but to deliver a positive return in different market conditions. Other strategies might be linked to more traditional benchmarks, so [the investor] might see more volatility. The manager might operate a strategy that, over the long term, aims to deliver good returns.”
Employers and trustees need to be sure a fund manager will put together portfolios that will eventually deliver good returns and will not buy a stock they are unsure about just because it is in the stock market index, (which is used as a benchmark to measure the performance of investment portfolios).
A fund manager will also become more desirable if it is supported by an independent risk-management system that allows it to get feedback on its investment strategy and help it understand the severity of any risk taken.
Another way to optimise the performance of fund managers is to use an intermediary or consultant to help navigate the marketplace.
A consultant will also monitor a fund manager’s performance by meeting up with it throughout the year. “We look at a [fund manager’s] business model and whether asset management is a core part of its business or peripheral to it,” says Bailey. “A key part is how staff are aligned to the results of their [pension scheme] clients. With a hedge fund, we would be looking for the manager to have a lot of its own money invested in it.”
A consultant might also look at whether the ways in which fund managers are remunerated drives effective performance and loyalty. Fund managers with a high turnover of staff are viewed less favourably.
Finally, employers should also ensure they do not overpay fund managers. Bailey says: “Negotiate hard on fees. That is something we do a lot of. It adds a lot of value.”
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