LONDON - U.K. pension fund use of balanced managers has remained stable, but there has been a steady rise in the use of specialist managers, according to a survey by PDFM Ltd.
The apparent paradox is explained by use of both types of managers by many U.K. pension funds.
Trustees are reluctant to fire a balanced manager that is doing well, said John Marsh, a director at PDFM, which is a unit of UBS Asset Management London Ltd. But when they do fire a poor-performing balanced manager, pension funds might replace the firm with a number of specialist managers - while retaining their strong-performing balanced managers, he explained.
Overall, however, U.K. pension funds appear to be firmly wedded to the use of balanced managers. And those managers receive discretion to invest in U.K. and overseas stocks and bonds and sometimes property.
According to PDFM's 1995 Survey of Investment Management Arrangements, fully 77% of 418 pension funds surveyed used at least one external balanced manager as of early 1995 - the same level as last year. Even larger funds remained committed to balanced management: 53% of funds with more than 500 million ($775 million) in assets employed at least one balanced manager.
Medium and larger-sized funds tend to employ more than one balanced manager. Nearly one quarter of funds with assets between 200 million and 500 million use three or more balanced managers, while 43% of funds exceeding 500 million use at least three balanced managers.
Figures on use of balanced managers also include multi-asset class structures, where permissible ranges for each asset classes are given to managers. These structures have become increasingly popular as many U.K. funds have commissioned asset/liability studies in recent years. Adoption of these studies also has led to growing use of customized benchmarks, now up to 42% from 35% in 1992, according to the survey.
"Our experience is more and more clients are doing these, and it's no longer just the province of big clients," said Andrew Dyson, a senior consultant at William M. Mercer Investment Consulting, London.
"There's much more increased usage of asset/liability modeling and especially increased use of specialized benchmarks," he added.
Still, the survey found only 31% of funds reported that asset/liability modeling has a "significant influence" on portfolio structure - down from 41% last year. Mr. Marsh could not explain the decline.
Differences in the surveyed responses may account for part of the change: last year, PDFM received only 356 responses, 15% fewer than in 1995. However, the lower response also could reflect that many U.K. funds did not change their structures following completion of asset/liability studies.
"That often happens," explained Susan Douse, a senior consultant at Watson Wyatt Worldwide, Reigate. Trustees commission a study and then decide they are happy with the traditional approach, she said. "It's always very difficult to live with a decision that is different from the pack," Ms. Douse said.
Despite the continued commitment to balanced management, use of specialist managers is on the rise. The biggest increase is in the use of bond and index-linked gilt managers. This trend is driven by the growing maturity of many British plans, some of which have carved out specific bond mandates to lower their overall equity exposure.
The proportion of pension funds using specialist U.K. and overseas bond managers has jumped to 16% from 11% last year, while the proportion using index-linked managers has doubled, to 14%.
But interest in equity managers also is growing. For example, 25% employ active U.K. equity managers, up from 22% last year and 17% in 1993.
Use of tactical asset allocators, however, has remained low, rising slightly to 8% this year from the 5% to 6% level during previous years.
But when PDFM asked who was responsible for setting asset allocation, the role of tactical asset allocators had shrunk to 8% this year from 15% in 1992.
While the PDFM survey speculates the decline "probably reflects a general failure to add value," Ms. Douse believes the question is muddy.
She said there has been an increased willingness by trustees and investment committees to take on asset allocation on a strategic basis, but still may turn to TAA managers to obtain incremental returns on a short-term, tactical basis.
Indeed, the survey shows that, at 71% of U.K. pension funds, trustees and investment committees are responsible for setting the asset mix, up from 66% last year and 60% two years ago.
While TAA managers generally had a rocky year in 1994 because of the currency hedges they employed, the jury still is out on their long-term performance, she added.
Other highlights in the survey include:
Use of currency hedging has soared in the past two years to 35% from 20%, probably reflecting hedging of the yen. One-fifth of respondents still consider currency hedging to be inappropriate for their funds.
Use of equity index and gilt futures is rising slowly, but use of traded equity options is declining.
More than half of funds consider securities lending to be inappropriate.
Less than 10% engage in stock-lending for domestic and overseas securities.
Two-fifths of funds do not expect to consider hiring global custodians, while only 21% already use or are considering using such custodians. Consultants, however, say they are seeing a growing trend toward hiring global custodians.
There is greater use of money purchase schemes. PDFM reported that 12.2% of respondents currently operate a money purchase scheme in addition to a defined benefit plan, up from 10.7% last year.
Plus, 7.6% of respondents are considering creating a defined contribution plan.