LONDON - The big continue to get bigger.
The top five U.K. money managers ran (pounds) 141.6 billion ($220.6 billion) in U.K. pension assets as of the end of 1994 - just (pounds) 1 billion less than the year before, despite an average 4% decline in value in pension assets in 1994.
That means the Big Five run 35.4% of the U.K.'s estimated (pounds) 400 billion in pension assets, a 4.4% increase in market share from the end of 1993.
But concentration of assets actually is more severe. The top five control about half of the (pounds) 250 billion in externally managed, segregated pension assets.
This comes as more bad news for boutique and non-British money managers hoping the door finally might open wider for their wares. Desires that proposed minimum solvency rules, the growing maturity of U.K. pension funds and increased use of asset/liability modeling would encourage trustees to adopt more specialized mandates have not come to pass.
While more pension funds continued to adopt customized benchmarks and a trickle switched to specialized mandates from balanced portfolios, they often ended up picking the same four or five firms to manage those portfolios.
The four biggest active managers - Mercury Asset Management PLC, PDFM Ltd., Schroder Investment Management Ltd. and Gartmore Pension Fund Managers - continued to sweep up new business last year, as they have for the past five years. All of the firms are based in London.
Just because trustees are adopting fund-specific benchmarks "doesn't necessarily suggest that Gartmore and PDFM will get less of the money," said Alison Ramsdale, sales manager at Frank Russell Co., London.
Barclays de Zoete Wedd Investment Management Ltd., while one of the top five managers, is known primarily for its indexed products and usually is not included in the same grouping as the others. In addition, its segregated portfolios are buoyed by the inclusion of (pounds) 8.5 billion of the bank's various pension funds.
Another leading active U.K. money manager, Morgan Grenfell Investment Management Ltd. came on strong, with segregated accounts increasing to (pounds) 8.2 billion at Sept. 30, from (pounds) 7.4 billion at the beginning of the year. Segregated clients increased to 99 from 84 during that period.
The brand-name syndrome
Many smaller money managers chafe at the concentration of pension assets in the hands of a relative few. Some question whether the Big Four can continue providing added value and can handle continued growth.
Pension experts point to the example of Henderson Pension Fund Management, London, a highflying performer in the mid-1980s that then became overwhelmed by the flood of assets coming in through its doors. Henderson officials recently announced profits for the year ended March 31, 1995 will be harmed, because of market declines and the loss of institutional business. Reports suggest the firm has lost nearly (pounds) 2 billion in U.K. pension assets in the past 12 months from (pounds) 5.3 billion at the end of last March.
Andy Howse, assistant director of marketing at Lombard Odier Investment Management Services Ltd., noted weak markets in 1994 also drove trustees to the same short list of managers. "Members, if times get tough, want names they know," he explained.
The growing number of participant trustees on pension boards also is heightening the demand for brand names, others noted.
Jane Welsh, a senior consultant at Watsons Investment Consultancy, Reigate, said the firm's clients gave 70% of their active business to six managers in 1994. Given the demands of investing in global markets, the requirements of being expert in all areas are increasingly difficult, she said. "I don't find it surprising and I don't find it unhealthy," she added.
In fact, some pension funds hire two or more of the top managers. Imperial Chemicals Industries, which just farmed out most of its (pounds) 4.3 billion pension fund, picked BZW to run a nearly (pounds) 2 billion U.K. equities passive brief, while selecting Schroder and PDFM to managed global mandates of nearly (pounds) 1 billion each (Pensions & Investments, Feb. 6).
Similarly, Zeneca Ltd., which took its (pounds) 1.4 billion pension fund from ICI's in-house team, picked Schroder and MAM to run U.K. balanced portfolios, and PDFM for an aggressive U.K. stock mandate. J.P. Morgan Investment Management Inc. won a global equities brief.
But others observe assets have poured into the Big Four because those managers consistently have delivered superior performance.
"Performance is driving it," said Peter Warrington, director, The WM Co., London.
Investment approaches differ
Each of the Big Four managers is distinctly different in its investment approach. Worries of hiring a closet indexer are ill-founded, experts said.
Schroder, for example, is known as a steady, solid performer that consistently outperforms the averages year in and year out. Its portfolio managers all work in teams to ensure uniformity of results.
Schroder's strong 1993 performance of 32.6% for segregated portfolios was unusual. Last year's 4.3% loss brought the firm down to earth but still provides it with a strong long-term track record. The firm picked up (pounds) 1.9 billion in net new business from segregated accounts last year - not counting the huge award from ICI, which occurred early this year.
MAM, the market leader, gives far more autonomy to its managers. Last summer, it reorganized its managers into teams designed to cater to different types of accounts. This way, the firm can better service its clients, said Lynn Ruddick, director.
Mercury's investment approach, which adjusts according to the stage of the market cycle, has not changed, she said. Despite some shrinkage in total pension assets under management, the firm won (pounds) 1.6 billion in net new business last year.
Gartmore, whose assets under management have soared from a smaller base in the past few years, did institute a significant change in its investment approach. Reflecting its rapid growth rate, the firm dropped its list of approved stocks from which portfolio managers could invest. Instead, managers now select stocks from a sector-approved list.
Gartmore's year-end figures on assets on management were not available. Based on its pooled fund performance in the second half, its pension mandates would have swelled by some (pounds) 400 million.
While Gartmore is more growth-oriented, PDFM is a pure value player. The firm also underweighted equities about 10 percentage points below the industry average for the past two years. PDFM has experienced a steady growth rate in assets under management of between 10% to 15% a year, which is pretty manageable, explained John Marsh, director.
PDFM's managed fund fell only 0.9% last year, ranked fifth in the Combined Actuarial Performance Services Ltd.'s 63-member pooled fund universe.
Hope for the future
Concentration in the U.K. market is not a new phenomenon, as managers' stars tend to rise and fall. Henderson; Hill, Samuel Investment Management Ltd.; Fleming Investment Management Ltd. and Lazard Investors Ltd. are among numerous previously top managers whose U.K. balanced business has declined sharply.
What is unusual is how long the current grouping of top managers has lasted. Experts believe Gartmore and MAM are the most vulnerable to client losses. The long-term question, though, is whether they - or others - might be replaced or whether there will be greater spreading of assets among managers.