LONDON - Balanced fund management still dominates U.K. pension investments, but a growing proportion of pension funds with more than 500 million ($775 million) are adopting principally specialist manager structures, according to a survey by PDFM Ltd., London.
PDFM's 1996 Survey of Investment Management Arrangements revealed that 74% of the 389 participating funds use one or more external balanced managers as their principal form of management, the same level as last year. However, 30% of funds in the 500 million-plus range principally use specialist managers, up from 18% two years ago.
The increase in specialist management stems from reduced use of internal management among larger pension funds: Of the 500 million-plus funds, use of internal management has declined to 25% from 34% two years ago.
Of all U.K. funds, the proportion using specialist managers as the main source of management edged up to 18% from 16% last year, while the proportion relying mainly on internal management declined to 8% from 10%.
Overall, 78% of all funds use at least one external balanced manager, whether or not as the principal form of management, the survey found. On average 70% of pension assets were under balanced management.
Among medium-sized funds (200 million to 500 million), there has been a shift toward using two balanced managers; three years ago, two or three balanced managers were equally popular choices.
Still, the number of specialist mandates is increasing, particularly for bond portfolios for maturing pension funds; 18% of funds use bond managers, up from 11% two years ago while 12% used index-linked gilt specialists, up from 7% two years ago. Specialist active U.K. and overseas equity portfolios also are growing in popularity, the survey found.
However, use of tactical asset allocation managers slipped to 6% from 8%. PDFM officials said the drop "probably reflects a general failure" by such managers to add value.
Currency hedging is gaining popularity: 43% hedged last year, more than double the level of 20% in 1993, the survey said.
The survey also found that pension funds are switching managers more quickly. This year, 24% of the surveyed funds dropped a manager last year, up from 18% the previous year. Pension funds sponsored by subsidiaries of U.S. and Canadian companies were the most active: 37% changed a manager during 1995.
Money purchase schemes are growing in popularity. Only 2% of funds operate a defined contribution scheme instead of a final salary scheme for all employees.
But 13% are considering setting up a defined contribution scheme for new employees only, up from 3% two years ago.
Among the largest funds, 16% are thinking of implementing a money purchase scheme, up from 6% just last year.