GREENWICH, Conn. - The benefits of using fewer money managers and those with multiple capabilities are becoming increasingly clear to U.S. pension plan sponsors, Greenwich Associates' 24th annual investment management survey shows.
Large funds continue to move away from using as many as 50 managers specialized by style and asset type - a 1980s trend driven by the desire to increase performance - toward what Greenwich calls "the New Paradigm concept."
The concept, first described by the Greenwich, Conn.-based consultant in 1992, says that less is more. Instead of employing 15, 25 or even 50 different managers for different asset classes and different categories within classes, plan sponsors use two or three managers to handle their core needs.
This way, fund executives develop strong relationships with each manager, each covering a broad range of markets and products.
"Specialists will continue to exist in this new model but fewer of them will be needed - or wanted," the Greenwich survey said.
Among the survey highlights:
Despite substantial increases in the assets of the average U.S. pension fund, the average number of investment managers used has remained flat: 9 in 1993; 8.9 in 1994; and 9 in 1995.
The number would have declined had it not been for the counter-trend of smaller plans adding managers while larger plans shed managers, according to the survey. (Greenwich's universe includes 2,165 corporate, public and endowment funds.)
In 1995, the average corporate pension fund with more than $1 billion in assets used 17.2 managers, compared with 18.1 the prior year; public funds and endowments of that size shrunk managers even more dramatically to 17.9 from 21.5 and to 20.6 from 16.5, respectively.
While large funds are reducing manager stables, corporate pension plans with less than $1 billion are increasing them. Corporate funds of $501 million to $1 billion and $101 million to $250 million increased the number used to 9.7 from 9.1 and to 5.3 from 5.1, respectively.
One-quarter of U.S. pension funds, and almost one-third of the largest funds, drop one manager and hire another every year, a task that would be greatly reduced if more funds were to adopt the New Paradigm concept, according to Greenwich.
Of course, these managers have to meet very high performance expectations.
In fact, Greenwich officials think plan executives are downright unrealistic in their portfolio return expectations.
Fund officials are expecting returns for the Standard & Poor's 500 Stock Index of 9.8% a year, compounded for the next five years, which "represents a breaking away from history the likes of which we've never yet seen," said Charley Ellis, a partner at Greenwich, in the survey.
Their expectations are similarly rosy for bonds. Plan sponsors anticipate a compound annual 7.5% return for actively managed bonds over the next five years vs. average inflation of 3.5%, for a real rate of return of 4% - optimistic in historical terms.
The return expectations for international equities are even greater - 10.5% a year for five years - an unlikely prospect given the current state of the Japanese economy and with U.K. and several European bourses at record highs, according to the Greenwich survey.
To enhance returns following the generous market of the last several years, pension funds are "accepting more risk and experimenting," the survey said. In bonds, that means extending bond portfolio durations; in stocks, they are trying their hands at market timing and considering alternative investments.
Greenwich officials contend that forging relationships with multiproduct managers will serve pension executives well in grappling with how to allocate assets, given the unprecedented strong run in stock and bond markets.
In the survey, Mr. Ellis said these money managers are well-equipped to go beyond picking stocks to making broad long-term asset allocation decisions such as "keeping out of an apparently irresistible asset class like the Japanese stock market in 1989-1990, or getting into real estate a couple of years ago, before it became fashionable."
It's significant that the larger funds are leading the charge to fewer managers because they are often trend-setters, with the 100 largest commanding 60% of all employee benefit assets.
The percentage of funds actually having a "strategic relationship" with a manager is steadily rising, while the proportion not interested in this concept is falling, particularly among the largest funds. Twenty percent of funds with assets of more than $1 billion now have such a relationship, up from 12% only two years ago. The percentage of those not interested fell last year to 23% from 28%.
Among tax-exempt funds of all sizes, 41% of corporates, 35% of public funds and 43% of endowments said they would seriously consider using a so-called New Paradigm manager.
Among funds with more than $1 billion in assets, the figures rise to 56%, 40% and 49%, respectively.
As many as 25% of very large tax-exempt funds now use a manager for multiple products: 16% of very large public funds do so, as do 30% of very large endowments and 25% of large corporate funds, according to the survey.
The top three capabilities sponsors seek in New Paradigm managers are advice on strategic asset allocation, advice on long-term goals and objectives and a range of well-managed core products so they can downsize their internal staffs and simplify their manager roster.