LONDON - Executives of smaller U.K. pension funds are waking up to the possibilities of specialized investment management, including derivatives and quantitative management, according to a survey by Buchanan Capital Management Ltd.
But they still have a long way to go. Less than one-quarter of the 166 pension fund officials surveyed use volatility as a measure of risk, and less than 10% use other measures of market risk.
What's more, nearly a third of the group did not know how their money managers measure risk.
Given British pension funds' focus on median performance in industrywide league tables, most funds tend not to adjust returns for market risk.
Still, the study is heartening for quantitative managers trying to carve out niches for themselves in the United Kingdom.
"Because there is not a huge amount of interest in active quant at the moment, it is bound to increase for U.K. pension funds as it has in the (United) States," said Peregrine Moncreife, chief executive of Buchanan, which invests in market-neutral, hedging and tactical asset allocation strategies. "I think it (the study) is encouraging."
"I have the definite sense that the wheel is moving faster than it was two years ago," said Bill Goodsall, managing director, First Quadrant Ltd., London, which offers several active quantitative strategies.
Progress, however, may be slow. While U.S. pension executives have hired a plethora of specialized managers, their U.K. counterparts have not done so, said Mark Tapley, chief investment officer of Quorum Capital Management Ltd., a London-based active quant manager.
But experts agree that minimum solvency requirements included in the Goode Committee report and the U.K. government's proposed pension legislation will lead British pension executives to focus more on asset allocation and risk issues.
Pension funds covered in the survey had assets ranging between 11 million ($17 million) and 8 billion ($12.3 billion), but four-fifths had assets under 500 million ($770 million) each.
Of the respondents, 56.6% said none of their assets is managed in-house. Of those using external managers, there was a roughly even split between use of balanced and specialist managers.
While those using balanced managers tended to be smaller pension funds, there still were 17 funds of between 301 million and 500 million and three funds above 2 billion who do not use specialist managers.
Of those using balanced managers, 53% said they are happy with balanced management; 19% said the performance of specialist management has yet to be proven; and 12% said they wouldn't know how to deal with the issue of setting the asset allocation.
Funds using specialist managers use them most for international equities and U.K. equities. Smaller numbers use specialists to handle bonds and real estate portfolios, while only a relative handful hire specialists to run emerging markets, index fund, asset allocation and venture capital portfolios.
Three-fifths of the survey group do not have any indexed assets. Of those using some indexation, the majority index up to half of their pension assets, but a quarter of those using indexing said they indexed between 50% and 75% of their funds.
Buchanan did not find any significant correlation between the size of the fund and the percentage of assets indexed.
U.K. pension executives still are working up the learning curve when it comes to active quantitative and derivatives strategies.
Two-thirds of the respondents said they had heard of active quantitative management, while 26% said they had not even heard of it. Nearly one-quarter said they had some interest in the strategies.
