Not if we consider this in the context of the well-documented shift from balanced management to core-satellite asset allocation. In this case, it makes perfect sense to subscribe to a portfolio structure whereby a significant core passive allocation underpins a series of specialist strategies.
However, the report registers surprise at the rising popularity of passive management and puts it down to disappointment with the performance of active managers, particularly after accounting for active fees.
If this is true, active managers have cause to be worried, while pension funds might do well to ponder the wisdom of their actions.
Such investors are under pressure not only to match assets with liabilities (the survey finds that allocations to fixed income have risen sharply over the last four years) but to generate good excess returns. If a particular investment strategy is not performing as well as expected, surely the answer is not to pull the money in order to boost the passive portfolio but rather to switch to a greater number of more aggressive alpha-generating mandates.
These might include high yield and emerging market debt and alternative assets such as hedge funds, private equity, commodities and real estate.
Hymans does expect demand for passive portfolios to continue this year in line with the trend towards core-satellite asset allocation. Demand for specialist investment briefs is growing as assets run in balanced mandates fell from 33 per cent to 18 per cent between 2001 and 2005.
Survey respondents reported a decline in assets managed in hedge funds. This is not surprising in light of the poor returns posted by hedge funds last year. Currency overlay and currency pooled funds showed the largest increase in assets under management in 2005.
The report notes that investors seem to share Hymans’ view that currency management is an area where active managers might have a better chance of adding value.
Although investment in alternative assets classes has grown significantly, Hymans notes that it still represents only a small part of total assets under management for UK pension funds.
Allocations to alternative assets by UK institutional investors are rising at a mere snail’s pace. According to Vince McEntegart an investment consultant at Hymans, the average UK pension fund holding in alternative assets is 15 per cent. But property (a more familiar asset class to UK pension funds) accounts for 8 per cent to 10 per cent of the total, with the remaining 5 per cent divided among private equity, hedge funds and sometimes commodities.
A major stumbling block to greater allocation to alternative assets is, of course, lack of education on the part of the institutional investor. In fairness, many asset managers are making valiant efforts, through conference presentations and seminars, to inform pension funds about hedge funds, private equity and commodities. This in itself is an onerous challenge and one compounded by the fact that the UK consultant community has yet to be convinced of the merits of investing in alternative assets.
Mr McEntegart admits that firms such as his could be doing more in terms of giving clear information and direction to pension funds. But he says that the finger of blame should be pointed equally at asset managers and trustees who could also be doing more “to move things forward”.
He adds that consultants do not like to force new investment ideas on their clients, but prefer to wait until clients have gained an understanding of new products and strategies. The problem, he contends, is that if pension funds are struggling to get to grips with lots of new ideas, there is going to be a tendency to do nothing.
He says: “If I go out to a client and introduce too many new ideas to them, the chances are they are not going to buy any of them. There can be a sense of ‘where do you turn?’ and sometimes then, passive management is where people turn.”
I thought pension funds were supposed to be able to turn to their consultants for information and guidance! Apparently not.
The survey shows that pension funds, with a view to diversifying their UK equity exposure invested more in global equities last year. Hymans lauds this move in its report: “Global managers have a greater opportunity to add value, given the diverse sources of additional return – from stock, sector and country decisions”.
But while reducing reliance on a single stock market is going to have some positive effect, investing in global equities alone does not offer sufficient portfolio diversification.
My editorial last month called on pension funds to become better informed in order to break their dependency on consultants for direction. It seems the need for pension funds to be proactive becomes more pressing, if consultants are admitting that their approach to alternative asset classes is more passive than enthusiastic.
Henry Smith, editor
henry.smith@ft.com
