See Inside: U.K. Pension Funds and Money Managers
£2.2 trillion held by top 25 U.K. money managers
Investor shift toward passive management, fixed income, alternatives helps largest 10
By Thao Hua | January 21, 2013
The 25 largest U.K. money managers had combined assets under management of £2.2 trillion ($3.4 trillion) as of June 30, with insurer- and bank-owned firms dominating the top 10, according to Pensions & Investments' inaugural survey of U.K. money managers.
Legal & General Investment Management placed second with £275 billion and BNY Mellon Asset Management was in third with £220 billion.
Schroders PLC was the highest-ranked U.K.-based independent manager, coming in 10th with £73 billion in P&I's survey, which ranked managers according to AUM sourced from institutional and retail U.K. clients.
Of the top 10, half were money management subsidiaries of insurance companies. Besides LGIM, Aviva Investors, Scottish Widows Investment Partnership, Standard Life Investments and M&G Investments placed fourth, fifth, sixth and eighth, respectively. Aviva had £140 billion in U.K. AUM as of June 30; Scottish Widows, £127 billion; Standard Life, £115 billion; and M&G, £83 billion.
“By the nature of their underlying insurance clients, these asset managers have had to be good risk managers for a long time,” said Pete Drewienkiewicz, director and head of manager research at Redington Ltd., a London-based independent investment consultancy. “That keen approach to risk management has proven valuable as the direction of travel for U.K. pension funds is to substantially derisk.”
Three major trends have influenced U.K. asset inflows, and all managers in the top 10 have benefited from one or more of those market drivers, according to investment bankers, analysts and consultants. First, the move by all investors to passive management and away from active strategies clearly helped put firms such as BlackRock and LGIM at the top. The second raison d'etre is the shift into fixed income from equities. The third factor influencing asset flows is further diversification into alternative asset classes and more global strategies, sources said.
“ BlackRock benefited from all three” market trends, said one consultant who asked not to be identified.
Strength in passive strategies
BlackRock (BLK)'s strength in passive strategies, including exchange-traded funds, underpins its leading position on the list. In the U.K., the fund manager is also dominant in fiduciary management and liability-driven investing, as well as active LDI, which targets some additional returns on top of the traditional liability-matching assets portfolio.
Arno Kitts, London-based managing director and head of U.K. institutional at BlackRock, said that alternatives, including non-traditional fixed-income strategies such as infrastructure debt, continue to be a key source of expansion. In November, the firm hired a London-based infrastructure team from The Blackstone Group LP. Other highlights include strategies based on risk factors, smart beta and global fixed income.
In some cases, a firm's active management business is gaining strength even as its overall success is grounded in passive territory. For example, LGIM now runs more active fixed-income assets in the U.K. than it does in passive fixed-income strategies, said Hugh Cutler, LGIM's London-based head of Europe and the Middle East. Institutional inflows in credit helped boost the team's AUM in active fixed income, which totals £75 billion sourced from U.K. clients.
“The single biggest element of growth” in the U.K. for LGIM is in liability-driven investing, Mr. Cutler said.
Because LGIM's parent company, Legal & General Group PLC, also provides insurance-based pension buyouts, one of the ways LGIM has been able to attract pension fund clients is by “providing a path of risk management” from LDI to a complete buyout, Mr. Cutler added. In aggregate, U.K. pension funds will continue to reduce inflation risk, interest rate risk and equities risk in their investment portfolios. “It's a one-way bet,” Mr. Cutler added.
The importance of LDI capabilities led the Bank of New York Mellon (BK) Corp. (BK) to acquire Insight Investment in 2009. With £166 billion in U.K. AUM, Insight powered BNY Mellon Asset Management into third place in P&I's ranking.
“There are few pension funds that don't incorporate some form of LDI into their overall investment strategy,” said Andrew Welch, head of business development at Insight based in London. “How and when to implement LDI is the crucial issue, and pension funds differ in their views of inflation, real interest rates, and the volatility and future direction of the markets. But they are all putting the plumbing in place, so that there's a strategic framework to implement their LDI strategy over time.”
Even within LDI, managers are pushing the boundaries through the use of derivatives. Besides “plain vanilla” interest rate and inflation swaps, investors are using a broader set of instruments to find the most efficient way of matching assets to liabilities, said Phil Edwards, principal within Mercer's investment consulting business. For example, gilt repurchase agreements, total return swaps, swaptions and asset swaps have all been introduced into the LDI repertoire of U.K. pension funds in recent years, said Mr. Edwards, who is based in Bristol, England.
Mr. Welch added: “Six or seven years ago, LDI was seen as a "hire-and-forget' strategy. ... In the post-Lehman world, there are interesting dislocations and, therefore, considerable opportunities. We're managing liabilities first, but also capturing opportunities.”
Other top 25 managers benefiting from LDI, and the related shift to fixed income from equities, include M&G, Schroders and Pacific Investment Management Co. LLC, which ranked 20th with £36 billion in U.K. AUM.
Another key issue
With most U.K. pension funds currently underfunded, another key issue for many of them is to improve solvency levels with more controlled volatility, sources said. As a result, portfolio diversification by these investors has led to more demand for strategies that are global, with particular emphasis on emerging markets, and alternative asset classes.
U.K. institutional investors are refocusing on their growth portfolios, following a tumultuous few years in which many have meaningfully shifted into fixed income from equities, said Nick Spencer, London-based director of consulting for Europe, the Middle East and Africa at Russell Investments.
“They're not necessarily rerisking. What they're doing is looking for smarter ways to take risk,” Mr. Spencer said. U.K. pension funds “need to rebuild funding levels over a number of years, and with interest rates set to remain lower for longer, they're shifting their attention back to growth assets.”
Active management is still in demand, but investors are also wary of certain types of active management in which alpha is quite unstable, Mr. Drewienkiewicz of Redington said. “If the alpha comes from excellent processes and systems, then ultimately, the alpha is more sustainable. ... Investors are moving from less stable forms of alpha to more stable forms of alpha.”
John Troiano, London-based head of the global institutional business at Schroders, said strategies that have gained the most inflows include corporate and high-yield bonds, emerging markets debt and emerging markets equities. Aberdeen Asset Management, HSBC Global Asset Management and Hermes Fund Managers Ltd. are among other U.K-based managers that have benefited from the diversification into emerging markets and alternative asset classes. Hermes ranked 23rd with £20 billion in U.K. AUM.
“Emerging markets (debt and equity) is where we've seen a lot of inflows” in 2012, said Andy Clark, London-based CEO of HSBC GAM in the U.K. “Since emerging markets is in our (company) DNA, this is where we will continue to innovate, both on the passive and active sides.”
Within fixed income, another source of institutional asset inflows is in alternative debt, including bank loans, infrastructure debt, student housing and ground rents, consultants said. In the past two years, managers including Standard Life, LGIM and BlackRock (BLK) have added such investment strategies to their institutional offerings.
“Investors are attracted to the high illiquidity premium of these assets,” Mr. Drewienkiewicz said. “These are longer-dated opportunities that can be used to match liabilities, but they also have return-seeking characteristics.”
Paul Abberley, interim CEO at Aviva Investors based in London, said asset inflows at Aviva Investors have been robust in asset classes such as global high yield, global emerging markets debt, absolute return, infrastructure and real estate. “What we saw (in 2012) was a desire for income as yields plunged,” he said.
“There's greater trust in real estate beta,” Mr. Abberley added. “In the longer term, (investors) see fixed income as a poor asset class to protect them against inflation. Yet equities are not going to necessarily thrive in high inflation either. Real estate, however, is seen as a good hedge against inflation. That's also where infrastructure comes into its own.”
Diversified growth and other unconstrained strategies also have helped bolster U.K. AUM for managers. At Standard Life, for example, one of the firm's most successful active strategies is the Global Absolute Return Strategies fund, which was introduced in 2006 and had about £17 billion in AUM as of June 30.
Mr. Troiano of Schroders, whose company also has benefited from the growing interest in such strategies, added: The need for sustained alpha has also led to “strategies that are based on outcomes in terms of understanding investment requirements and identifying solutions to deliver those outcomes with the least amount of volatility.”
This article originally appeared in the January 21, 2013 print issue as, "£2.2 trillion held by top 25 firms".