Since the turn of the millennium, asset management forums have featured talks and seminars on strategies such as tactical asset allocation and alternative investments like hedge funds, property and private equity. And every year for the last five years, these presentations have been pitched at the most elementary level, a fact which suggests that asset managers are locked in a seemingly endless struggle to get their message across to British pension fund trustees and those influential gatekeepers, the consultants.
It is well recognised that pension funds in the mature institutional investment markets of Holland and Scandinavia are further down the road than their UK counterparts in adopting a wider range of strategies and asset classes. For instance, back in 2003 when PME, the €19bn Dutch metalworkers pension scheme, awarded Goldman Sachs Asset Management a €750m global tactical asset allocation mandate, many pension funds in the UK probably didn’t know what the abbreviation GTAA stood for.
At a recent investment conference, hosted by F&C Asset Management in London, Paul Niven, head of asset allocation observed that little has been seen by way of allocation to alternative investments in the UK. Industry figures he said, showed that only 1 per cent of UK pension fund assets are allocated to hedge funds and private equity. By comparison, the greater adoption of such asset classes in the Netherlands was due to a closer working relationship between the pension scheme and fund manager, a “different” relationship with consultants and much more openness to new and innovative approaches to portfolio management.
Mr Niven added that Dutch pension funds are more proactive in attempting to minimise interest rate risk. He said F&C had already implemented liability-driven investment strategies for pension funds in advance of the new FTK Dutch pension fund accounting regulations due to come into force in the Netherlands next year.
According to F&C, most UK pension funds are still using traditional balanced mandates. Relatively few are pursuing the so-called “new balanced” approach which builds a diversified portfolio of traditional and alternative assets. And, while there has been much talk about portable alpha strategies, little action has followed. So it would appear that the many years spent tirelessly promoting different styles of investing and repeating the same messages over and over again ad nauseum have yielded little in terms of better informed investors with the ability to shake off the ways of old.
How can an education deficit persist for so long? Why are so many UK pension fund trustees so reluctant to move outside their comfort zone of balanced mandates? Unfamiliarity with and fear of derivatives and leverage are two reasons why, for instance, they are slow to pursue LDI strategies. And there is still a perception that hedge funds are a high risk, high return asset class, which is true of some such strategies but not all. Last year funds of hedge funds, the preferred choice of most first-time institutional investors, produced modest returns for modest levels of risk.
So, what will it take to get UK pension schemes to fully embrace strategies such as LDI, GTAA and alternative assets?
Get better informed and use common sense, counselled Alastair Ross Goobey, CBE during an address at F&C’s investment conference.
“There is a terrible danger that we all simply follow the advice of the professional advisers without really challenging it,” said the former investment manager of Courtaulds Pension Scheme and chief executive of Hermes Pensions Management, who is now a governor of the Wellcome Trust.
But the problem is that UK trustees have been acting this way for years with the result that no one took the consultants to task in the late-1990s and early part of this century when they were making less than encouraging noises about tactical asset allocation and hedge funds.
In Groundhog Day, only by learning to engage with people on an equal basis rather than trying to manipulate them, can Bill Murray break free of the past and face the future in a new light. Similarly, trustees need to break their dependency on consultants for investment advice and direction. Only by becoming better informed about new and innovative ways of investing, can they confidently debate and challenge the views of the consultants and ultimately take charge of their own investment destiny.
Henry Smith, editor
henry.smith@ft.com
