U.K. firms keen to export diversified growth strategies

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Eyeing: Nicolaas Marais said Canadians are looking at diversifed growth strategies.

U.K. multiasset managers have set their sights on the U.S. institutional market, drawing on the success of diversified growth fund strategies that have gained rapid popularity among British investors.

Managers know it's never easy for “outsiders” to win assets from U.S. institutional clients, and executives at U.K. firms cite a litany of impediments.

“The competition is very strong here,” said Philip R. Nelson, research consultant at NEPC LLC, Boston. In recent years, U.S. newcomers have joined stalwarts such as PanAgora Asset Management Inc., Pacific Investment Management Co. LLC and Grantham, Mayo, Van Otterloo & Co. LLC in offering multiasset strategies that use diversification and dynamic asset allocation to boost returns and dampen volatility.

“The universe has gotten much more robust in the last five to seven years,” Mr. Nelson said.

Into that mix come Baring Asset Management Ltd., Newton Investment Management, Schroder Investment Management Ltd. — all based in London — and Standard Life Investments, Edinburgh.

The good news for British managers is that it appears they have the wind at their backs.

The diversified growth fund universe — a subsection of the multiasset universe that includes risk parity, global tactical asset allocation and global macro hedge funds — has seen rapid growth in recent years. According to eVestment Alliance, Marietta, Ga., diversified growth fund assets globally hit $51.1 billion on June 30, up from $13.8 billion three years earlier. The data provider estimates about 75% of the increase came from net inflows.

The wider multiasset universe grew to $434.7 billion as of June 30, up from $182.1 billion three years prior. Growth in assets was helped by net inflows of $109 billion over the period, according to eVestment Alliance.

In July, the $239.3 billion California Public Employees' Retirement System, Sacramento, named Standard Life Investments as one of four finalists in a search for multiasset managers that share up to $2 billion. And in August, the 1.2 billion ($1.94 billion) Cornwall County Council Pension Fund, Truro, England, began searching for at least one diversified growth fund manager to run up to 140 million.

U.K. corporate defined contribution plans also are using the strategy. In an annual survey of FTSE 100 companies in May, consultant Towers Watson & Co. found that 70 of the 100 largest U.K. public companies offer a diversified growth fund as an investment option, up from 43 plans a year prior.

Still, U.K. multiasset managers are cautious when it comes to the U.S. market, citing concerns ranging from regulatory to operational to cultural as to why their strategies might not grow as quickly in the U.S. as in the U.K.

Fall of equity managers

The rise of multiasset portfolios has depended in part on the fall of equity managers. Americans' optimism and their “belief in private enterprise” make them somewhat less inclined to “give up on equities” as a major source of returns in pension funds, said Marino Valensise, chief investment officer at Baring Asset.

He said the U.S. is a “great opportunity,” but lags the U.K. in terms of pension reforms that have helped renew interest in multiasset investing.

“There has been a great push to have assets move in line with pension” liabilities in the U.K., causing pension funds to buy bonds or lower-risk equity assets, Mr. Valensise said. “The U.K. is light-years ahead of any other market in terms of multiasset.”

Baring runs $11.4 billion in multiasset strategies globally, almost entirely for U.K. pension fund and foundation clients.

After having worked in the U.S., Colin Clark, London-based executive director of the global client group at Standard Life, said he believes U.S. clients would be wary of “British managers showing up, making grand claims and then, frankly, disappearing.” SLI set up a Boston office in 2002 to manage U.S. assets as part of global equity and bond strategies. “It's really only in the last two or three years we've started to crank up the distribution activity” in the U.S., Mr. Clark said. “A good management firm is always built on good (investment) product first and distribution later.”

NEPC's Mr. Nelson echoed that concern: “You have to put staff on the ground here — it's a big expense. Most of (the international firms) really don't want to do that.”

SLI runs about $2 billion in multiasset strategies for U.S. clients, mostly in its global absolute-return strategy. Mr. Clark said there's a “great pipeline” in the U.S., and that assets in the strategy could double very quickly. A U.S. mutual fund version of the strategy, created in January and distributed by John Hancock Funds LLC, gathered $1 billion in less than nine months.

“We're not here to build a $2 billion business; we're here to build something meaningful to a $250 billion shop,” Mr. Clark said, declining say how large he expects its U.S. multiasset business will grow. SLI runs about $25 billion in the global absolute-return strategy, of which 60% comes from U.K. clients.

Despite a $130 million allocation in January from a “union-related pension fund” in the U.S., Newton's AUM in its Newton Real Return strategy tips heavily toward the U.K. As of Aug. 31, the firm ran 6.6 billion in the strategy for U.K. clients vs. $300 million for U.S. clients.

Tail wind

“There's definitely much more of a tail wind in the U.K.,” said Matthieu Duncan, head of business strategy at Newton in London. “There's no structural, fundamental reason it couldn't happen in the U.S. It's an education process; you have to invest the time in explaining it,” and Newton has been doing that the past two years, Mr. Duncan said.

Nicolaas Marais, head of multiasset and portfolio solutions at Schroder, said: “It's fascinating that (diversified growth) funds haven't really taken off outside of the U.K. The only interest we've seen lately is in Canada.”

For potential U.S. clients, Mr. Marais is leading with a slightly different multiasset offering, a strategic beta strategy that uses risk-premium-based asset allocation, with derivatives used for the underlying exposures.

His firm seeks to compete with risk-parity strategies and hedge fund managers. “The blur between multiasset and global macro and hedge funds is significant,” Mr. Marais said. “Competing in the strategic beta, risk-premia asset allocation space is very attractive. There are only a few players, and I think we offer a really interesting alternative to risk parity.”

Schroder manages $8 billion in multiasset strategies in the U.S., primarily as an intermediary, running options in the variable annuity market.

Steven F. Charlton, director of consulting services at NEPC, challenged the claim that U.S. investors aren't interested in diversified growth funds or similar strategies. “Everybody wants to reduce volatility,” Mr. Charlton said. “There's no lack of appetite. There's a lack of familiarity (with managers) in some cases.”

Mr. Charlton said NEPC's clients put up to one-third of total assets into multiasset strategies, including global tactical asset allocation and risk parity. “We think managers can add value by tactically leaning into different markets by adjusting their beta allocations,” and NEPC consultants like that multiasset managers all take different approaches.

“You can put four of them together, they diversify each other, and you end up with low-vol performance,” Mr. Charlton said. n

This article originally appeared in the October 1, 2012 print issue as, "U.K. firms keen to export diversified growth strategies".