|
The
first choice for people in pensions Pensions
Age has been designed to provide pensions professionals with a single
and authoritative source |
|
Putting
style to the test A turbulent time in the markets has also brought changes in investment style. Eighteen months ago, value investors were in the doldrums, with growth and momentum to the fore – but that seems to have changed. Pension schemes themselves have changed the way they allocate their funds. Tracking funds have taken a big share of the UK market. But now, with active funds beginning to perform better against the market, trackers have stabilised. Are they going into reverse? Eric Lambert, director of research and consulting at the WM Company, thinks not. “The growth of passive management continues, though it’s not as fast as it was in the early days. It particularly comes when funds that have a solo manager have a particularly lean time and take a fresh look at their arrangements. Nobody makes a 100 percent choice, but they’re attracted to some passive management as it dampens the volatility of their performance.” He also points out that trackers typically charge lower than the 20-30 basis points charged by traditional balanced managers (and up to 50 basis points at specialised, highly active managers) – so a decision to go passive for, say, 20-60 per cent of the total fund reduces the cost base and hence should enhance performance. Finlay Ross, a principal consultant at KPMG Investment Consulting, believes that: “Although active management has done well recently, there’s still a long term trend to passive. But the speed of change has certainly decelerated.” Increasing use of trackers within a ‘core/satellite’ strategy is leading to lower demand for balanced fund management – and much more for specialist management. As Finlay Ross notes “This is all good news for specialist managers with strengths in a few areas rather than the full spectrum of asset classes – and it’s all bad news for the big balanced managers.” The shift to international investing continues, particularly within the euro zone, and has seen fund managers shifting towards a sectoral approach – economic convergence in Europe has made country-picking skills irrelevant. Bob Collie, director of consulting at Russell, sees the change as affecting fund managers rather than owners first and foremost, saying: “It’s a revolution in fund managers’ attitudes. Funds will still appoint a European manager rather than, say, a car sector manager, but that fund manager will now be thinking in sector terms rather than country terms.” But with Staffordshire County Council Pension Fund now debating whether to run its overseas investments on sector rather than geographical lines, this may change. Rick Dentith, head of UK at Royal London, notes that the shift from country terms to sector terms provides active managers with more opportunities. “If you’re a purely UK investor then there are only two large public companies you can invest in but if you’re talking about a global perspective then you’ve got the US, the far east and Europe.” While these changes may affect the investment managers’ world, they don’t necessarily have an impact on those managers’ preferred investment style. If you are going to adopt a core-satellite strategy, then your satellites can include managers with a number of different investment styles and expertises. Finlay Ross says: “Rather than using a value manager as their sole manager, clients will balance a value manager against a growth orientated manager in a multi-manager package.” Obviously, though, if the ‘core’ is going to consist of index tracking investments, there’ll be rather more emphasis on active management in the other funds – implying that fund managers who are willing to take strong views are back in fashion. Does that mean that value investing is back? Tony Dye at Phillips & Drew lost out at the top of the internet boom, by moving aggressively into cash as the market roared upwards. Now that tech stocks have fallen, value investing does seem to be more in favour – or at least, value stocks. Eric Lambert thinks that most managers have not really adopted value rather than growth investing as a style – they’ve simply invested in value stocks, which is not quite the same thing. “For the UK market, style is still not a very big issue. Owners won’t pick a style, and consultants won’t do that either – they look for a blend.” But, he says, the recent divergence in performance between growth and value stocks may have changed this. “It’s still a long way short of where it is in the States,” he says, “but style has got on to the agenda now.” Dentith disagrees: “I don’t believe that you should be a value or a growth manager. That guarantees that you’re going to underperform some of the time.” Rather, he looks at each company on its own merits and decides if it is cheap or dear. “It’s the prospects of the company which are important to us.” On the other hand, Finlay Ross and Bob Collie both suggest that funds should focus on risk analysis, not investment style – and should control risk by striking a balance between differing management styles as well as different asset classes. Finlay Ross points out that even if Phillips & Drew is doing well now, clients who appointed it as their manager in the early to mid 1990s probably didn’t envisage how much risk was involved. “Clients are waking up to the fact that appointing a single manager with a particular strong basis can result in extreme returns.” Core/satellite structures and a greater use of derivatives are ways in which many owners and managers are looking to control risk. Bob Collie also sees risk control, rather than performance, as the primary task of the manager. “If performance is achieved at the expense of inappropriate risk, you won’t get away with it for long. Fund managers should not be either too under or too over exposed; the message which I think is getting through is about balance and about controlling risk. People are so much more aware of risk than they were five years ago.” Indeed, he says, it’s this awareness of risk which is pushing many managers towards a multi-manager approach, using specialist active fund managers – “it’s added value but also lower risk across the board.” Hedge funds, which are able to go short (selling stock they do not own) as well as purchasing investments, are better placed to make positive returns when markets have an unclear direction or indeed when sustained market falls occur. They have become increasingly popular with pension managers as part of the ‘satellite’ quotient. But Bob Collie says that though Frank Russell manages a ‘hedge fund of funds’, he still sees the trend to hedge funds as: “a lot of talk. I don’t know whether twelve months from now that will have translated from talk into action.” According to him, fund managers are using derivatives more often – but most funds are still not specifying a hedge fund quota as part of their allocation. Another trend making more noise than impact, as yet, is the move to socially responsible investment (SRI). This was first driven by the retail market, but now more funds are interested in using an SRI approach for part of their funds. Closely linked to the SRI movement is an increased level of shareholder activism; activist funds have been around for a long time in the US but are now moving into the UK and even onto the continent, where one or two have been quite active in the previously rather staid German market. Few owners are going 100 per cent ethical; most are placing only 2-3 per cent of their funds with specialist SRI manager. But
Eric Lambert says these figures conceal a real change; SRI has become
an implicit demand. “They ask their fund managers what are their
corporate governance rules and conditions. So you have a growth
of implicit rather than explicit SRI.” But even though the pension
fund marketplace is changing, with different emphases in terms of
style, some very traditional skills are getting rewarded. For instance,
stock picking is a prime focus, with new retail funds entrant New
Star pinning its stock picking colours to the mast and many managers
eschewing benchmarks in favour of a more active approach. It seems
that the market may change – but the skills the fund manager needs
never do.
|
 |
|