LONDON - Unilever PLC has overhauled the investment management of its 3.5 billion pounds ($5.7 billion) pension fund in a move that implements the fund's "golden circle" of preferred providers.
The restructuring by Unilever, a trendsetter in European pension circles, saw more than 1 billion pounds in overseas mandates split between Capital International Ltd. and J.P. Morgan Investment Management Inc.
The primary focus on the review, which was led by Chief Investment Officer Wendy Mayall, was to strengthen overseas equities expertise, a company statement said.
The big loser was Gartmore Investment Management Ltd., which sources said lost more than 1 billion pounds in global balanced assets.
Further, the loss to Gartmore and troubles facing other firms portend a shake-up in the highly concentrated U.K. money management business.
At Unilever, existing global balanced managers Mercury Asset Management PLC and Schroders Investment Management Ltd. retained multiasset mandates of roughly 1.2 billion pounds each, but have been given new customized benchmarks weighted heavily in U.K. equities. All of the managers are based in London.
Unilever officials declined to discuss specifics. Officials at Gartmore declined to comment.
Unilever's restructuring follows the adoption last fall of its "golden circle" of preferred money managers, spearheaded by Philip Lambert, head of corporate pensions.
Like a growing number of multinational companies, Unilever has developed a list of managers that could be used by its pension funds in subsidiaries around the world. This affords better quality managers to smaller funds and lower fees overall because more money is allocated to the firms.
The only managers in the golden circle not hired by Unilever's U.K. fund were Morgan Grenfell Investment Management Ltd., London, and Fidelity Investments, Boston.
Unilever officials had made final their list the day before news broke that Morgan Grenfell portfolio manager Peter Young had made large, unauthorized investments in unlisted technology companies through Luxembourg holding companies he had established.
It is believed Unilever officials have put Morgan Grenfell on hold, although they have not dropped the from the circle. "We continue to manage money for Unilever in other markets but not in the U.K.," said Rufus Warner, a Morgan Grenfell director in charge of the firm's U.K. marketing efforts.
Big Five face shake-up
The misfortunes of Gartmore and Morgan Grenfell reflect on broader trends of a potential shake-up among the top five U.K. active money managers.
Nearly one-third of 555 billion pounds in U.K. pension assets were in the hands of five managers as of June 30, according to William M. Mercer Investment Consulting, London: Mercury; Schroders; London-based PDFM Ltd.; Gartmore; and Morgan Grenfell.
That concentration - built on the lasting dominance of active balanced management - likely increased last year as Mercury and Schroder had banner years in winning new business.
But Morgan Grenfell, with 18 billion pounds in U.K. pension assets, has experienced the twin debacles of the Peter Young scandal followed by the explosive departure last month of U.K. pension head Nicola Horlick.
Meanwhile, PDFM, with 53 billion pounds in U.K. pension assets, suffered poor performance during the past two years, while Gartmore, with 31.7 billion pounds, has turned in shaky numbers during the past three years and has been busy digesting NatWest Investment Management. Gartmore's total includes 10.2 billion pounds in passively invested assets for U.K. pension clients.
Sidelined for new business
While it remains unclear whether any of those three face serious erosion of their existing client base, experts agreed they are sidelined as far as most new business this year.
Morgan Grenfell has chalked up stellar performance over the past five years, but observers are waiting to see if the firm suffers any further losses of senior investment staff after bonuses are paid this month.
Separate-account data were not available, but the firm's managed fund service (including property) racked up annualized returns of 12.1%, 10.3%, and 17.4% over the one-, three- and five-year periods, respectively, ended Dec. 31.
At value manager PDFM, performance was buoyed by a strong fourth quarter that favored value stocks.
The manager returned 9.3% last year for segregated portfolios (excluding property), below the 11.1% return of the median manager in the Combined Actuarial Performance Services Ltd. universe.
Despite conventional wisdom, PDFM's asset allocation actually has been neutral on returns, as low Japanese equity holdings and good overseas bonds have offset high cash holdings and low U.K. stock holdings. Stock selection has hurt returns.
Still, PDFM has nearly matched the CAPS median annualized return of 8.3% over the three-year period because of strong 1994 performance. Consultants said PDFM has performed well against value-oriented indexes, and believe the manager will hold onto much of its loyal client base. But it still could lose some of its more recently won mandates, because many U.K. trustees do not understand investment style and its effect on performance.
Gartmore's disappointing performance last year stemmed from asset allocation - an area where the manager usually does well, said Ian Martin, head of business development. Unhedged overseas bond exposure pulled down returns in the fourth quarter. Preliminary figures show Gartmore's separate accounts returning 9.8% last year.
The irony is that Gartmore had improved its U.K. equity returns, after a couple of bad years, he said.
Three-year figures show Gartmore returning 7.1%, while virtually matching the median over five years.
The Big Two?
The upshot is that 1997 represents the first opportunity in years for a major shake-up among the leading U.K. money managers.
"To a certain extent, what we're seeing is an important moment in the fund management industry, with the potential of the Big Five changing," said Nick Watts, deputy head of the U.K. investment practice at Watson Wyatt Partners, Reigate.
But most consultants say it's too soon to say whether there will be sweeping changes. "It's very premature to say the Big Five have become the Big Two," said Andrew Dyson, head of the U.K. practice for William M. Mercer Investment Consulting, London.
For one thing, U.K. trustees have become slower at pulling the trigger on a manager.
"The industry is looking beyond short-term investment performance in a way it wouldn't have five or 10 years ago," Mr. Watts said.
Trustees also are reviewing the structure of managers' organizations and investment processes, consultants said.
Nevertheless, increased media coverage of manager firings often causes other clients to follow suit quickly. "Once one of the Big Five starts losing," said Paul Haines, investment director at Sedgwick Nobles Lowndes Ltd., London, "it could be very swift and very severe."
Up and comers
Many experts believe concentration of U.K. pension business among the leading managers will lessen. That's especially true because the 1995 Pensions Act has caused trustees to examine investment strategies more closely, Mr. Dyson said.
More and more, trustees are adopting customized benchmarks and gradually boosting use of specialist mandates.
In addition, indexation is on the rise, helping firms such as Barclays Global Investors and Legal & General Investment Management Ltd., consultants said.
"When successful, high-profile managers run into problems, indexation will benefit," Mr. Watts said.
All the same, troubles among the Big Five are creating openings for other active managers.
Among the up and coming managers that stand to gain new multiasset class business: Fidelity, which has outstanding performance over one-, three- and five-year periods; Prudential Portfolio Managers Ltd., which has been rebuilding; J.P. Morgan; and LGT Asset Management, although the loss last year of U.K. equities chief Vivian Bazalgette to M&G Investment Management has cast a shadow on the firm.