AYLESBURY, England - The (pounds) 426 million ($682 million) Buckinghamshire County Council Superannuation Fund is returning to balanced management after encountering gyrating asset allocations from its balanced/specialist structure.
Buckinghamshire's dilemma provides insight into why many U.K. funds have been slow to embrace specialist management, unlike pension funds in the United States, the Netherlands and elsewhere.
"Unless you have some way of having your asset allocation under review, it surely is not controllable. There must be some form of risk," explained Michael Roxbury, principal accountant (treasury) for the Buckinghamshire fund.
The Buckinghamshire fund has used a mix of specialist and balanced managers for the past three years. The return to balanced management, expected to occur by early 1996, means the fund will terminate four specialists who managed a combined (pounds) 135 million ($216 million).
Those managers and their mandates are: Baillie Gifford & Co., Edinburgh, which manages (pounds) 74 million in U.K. equities; J.P. Morgan Investment Management Inc., London, which handles (pounds) 30 million split evenly between North American equities and European equities; Yamaichi Capital Management (Europe) Ltd., London, which runs an (pounds) 11 million passive Japanese equities portfolio; and Foreign & Colonial Pensions Management Ltd., London, which handles a (pounds) 20 million overseas equities portfolio with an emphasis on emerging markets.
Mr. Roxbury said the fund probably will employ a total of three balanced managers. The fund will retain balanced manager PDFM Ltd., London, which runs (pounds) 193 million, but also will review the performance of balanced manager Prudential Portfolio Managers Ltd., London, which runs (pounds) 98 million. Mr. Roxbury said the fund has no current plans to replace Prudential.
Still to be decided is whether any money will be passively managed and how much each balanced manager will be allocated.
Mr. Roxbury said manager performance had not been an issue. Three of the fund's four specialist managers had outperformed their benchmarks, he said.
While the fund had ranked in the fourth percentile of the WM 2000 in 1994, it ranked in the third quartile in 1993.
But the fund's asset mix had gotten out of whack. When Finance Director John Beckerley came on board in 1993, the fund's asset mix had deviated substantially from the median asset allocation of the WM 2000 universe of midsized U.K. pension funds. A major reallocation was performed. Subsequent quarterly reviews have shown little deviation from the norm, Mr. Roxbury said.
As of March 31, 1994, the fund's asset mix was 52.9% U.K. equities, 29.5% overseas equities, 3.1% U.K. bonds, 4% overseas bonds, 4.7% index-linked gilts, 0.5% property unit trusts, and 5.3% cash, according to Pensions Funds and Their Advisers 1995.
Meanwhile, the added burdens of running specialist managers and the need to consider corporate cultures are leading some long-time advocates of specialist structures in the United Kingdom to rethink their views.
"The lust for incremental returns isn't what's motivating everyone," said Len Brennan, managing director of Frank Russell Co., London.
According to a survey by The WM Co., Edinburgh, 75% of 152 U.K. pension funds with more than 500 million each had no specialist managers as of Dec. 31, 1994. Of 200 funds with less than 500 million in assets, only 5% had any specialist managers, WM analysts found.
How to address asset allocation has been a classic question for U.K. pension trustees, said Rob Baker, a senior consultant at William M. Mercer Ltd., London.
In general, there are three ways in which plans can handle their policy shifts within a specialist structure, consultants said.
First, trustees can adopt a strategic benchmark and allow a band of tolerance around the target asset mix. Such an approach can be used with balanced or specialist managers. Alternatively, portfolios can be rebalanced periodically, such as on a quarterly basis.
As U.K. pension funds increasingly are commissioning asset/liability studies, they are adopting strategic benchmarks.
Secondly, trustees can hire a tactical asset allocator that applies an overlay on the total portfolio, usually through use of derivatives. But TAA performance has been erratic, and there are a limited number of providers.
Lastly, trustees can take on the tactical asset allocation decision themselves, usually with the help of an external consultant, though relatively few do so.
As Mr. Roxbury said: "When you have four managers in distinct markets, it is difficult to get the asset allocation correct." It's especially tough "when a manager is doing very well, the assets have grown and we are removing 5 million" as part of a rebalancing, he added.
Still, others have been satisfied with this approach. Colin Hay, head of investment at the 950 million Lothian Regional Council Superannuation Fund, Edinburgh, said his fund successfully has handled asset shifts through quarterly strategy meetings. Present at those meetings are the fund's top outside portfolio managers, three Lothian officials, the plan's actuary and an outside consultant.
Some experts argue pension funds are better off sticking with balanced management.
George Henshilwood, partner at consultant Hymans Robertson & Co., Glasgow, said: "Going specialist is more complicated and requires more monitoring at the client end, and that's something clients are reluctant to do."
He added "There is a view in the market that specialization is better. I don't think that's necessarily so."
Even officials at Frank Russell, long considered an advocate of specialist management, agree balanced management has a role to play.
For trustees uncomfortable with taking responsibility for the asset mix or where the corporate culture won't tolerate the risk involved, it's appropriate to delegate the job to a manager, Russell's Mr. Brennan explained. "It's better to run a balanced fund manager well than to mismanage a specialist portfolio."
In fact, there is no empirical evidence to show that specialist management structures outperform balanced management.
According to a study by WM, pension funds using balanced managers only returned an annualized 22.2% vs. the weighted-average return of 21.1% of the WM All Funds Universe for the three years ended December 1993, the latest available data.
For the five-year period, balanced-only funds returned an annualized 16.5% vs. 15.7% for the weighted average.
Pension funds employing balanced managers only - which tend to be smaller funds - outperformed largely from underweighting in property and U.K. bonds, the study said.
The largest funds, which tend to use specialist or combination balanced and specialist approaches, performed the worst during those periods. They had higher exposures to real estate and index-linked bonds and lower exposure to equities.
The average-weighted returns of specialist-managed funds underperformed the 15.7% benchmark by 40 basis points during the five-year period and matched it at 21.1% during the three-year period.
For pension funds employing both balanced and specialist managers, they underperformed the benchmark returns by 50 basis points a year during the five-year period and 60 basis points during the three-year period.
Alastair MacDougall, research and consultancy coordinator for WM, said balanced management structures maintained their edge for the three- and five-year period ended December 1994 but specialist approaches had shown improvement, beating the All-Funds Universe. Improved stock selection in 1993 and 1994 accounted for the improved specialist performance, according to an updated study that will be released shortly.