JOHANNESBURG -- Manager-of-managers arrangements have taken root among South African pension plans, accounting for nearly 10% of the 700 billion rand ($100 billion) institutional pension market.
Penetration of the market by managers of managers, known in South Africa as multimanagers, is far higher in South Africa than in either the United States or the United Kingdom, where manager-of-manager mandates are estimated to cover less than 2% of pension industry assets.
In South Africa, the widespread shift to defined contribution arrangements and relatively low levels of education among some trustees have encouraged trustee boards to outsource the monitoring and selection of money managers, according to Rael Gordon, managing director of Investment Solutions Ltd., a manager of managers in Johannesburg. The 3-year-old firm has 30 billion rand in assets under management, the bulk of which is from institutional clients.
"Investment performance is much more important to members in defined contribution plans," he said.
In the current environment, where employee representatives comprise 50% of every trustee board, it often is easier and less risky to appoint an external firm to select and keep track of the managers, said Mr. Gordon.
But Geoffrey Nzau, managing director of independent consultants NBC Employee Benefits Ltd., Johannesburg, disagreed. He pointed to the weakness of domestic investment consulting services as a reason for the success of managers of managers in South Africa. Some large pension plans feel domestic consultants do not have the skills to run a manager selection process and prefer to use the services of an external specialist such as a manager of managers to spread and balance their exposure to money managers.
Another reason for the success of the manager of managers approach was that it had received considerable support from local consultants over the last few years, he said. The bulk of the South African pension market, particularly smaller and medium-sized plans, tend to follow closely the advice from their consulting actuaries.
Alexander Forbes of Financial Services Ltd., Johannesburg, the country's largest firm of consulting actuaries, has backed the use of manager-of-manager strategies by pension plans. The firm also is the majority shareholder of Investment Solutions.
The manager-of-managers approach is particularly popular among smaller pension plans, which do not have the internal resources to pick managers and monitor their performance, said Investment Solutions' Mr. Gordon.
It also is common for South African pension plans to appoint managers of managers to run their international portfolios, which currently are restricted to 15% of total plan assets, said Antony Lester, managing director of independent consultants Fifth Quadrant, Cape Town.
Many funds complain about the expense involved in hiring international managers. A manager-of-managers approach offers a relatively inexpensive way of accessing and monitoring a number of non-domestic managers, said Mr. Lester.
The 18.9 billion rand Eskom Pension & Provident Fund, Johannesburg, was due to announce new international equity managers by the end of July, and as Pensions & Investments went to press was believed to be in negotiations with executive of the plan, would not comment.
The Cape Municipal Pension Fund recently appointed SEI to run a 25 million rand international equity and bond portfolio. SEI has an estimated $1 billion in assets under management from South African clients.
Late last month, Frank Russell & Co., London, made its first move into the South African institutional market by linking up with Investment Solutions. market through domestic insurer Liberty Group, Johannesburg.
"South African trustees are recognizing that there are people out there better at selecting managers than they are," said Robert Barr, director of partnerships and distribution alliances at Frank Russell's office.
M Cubed Capital Ltd., Johannesburg, is believed to be the second largest domestic manager of managers in South Africa, with an estimated 11 billion rand in assets under management. It was described by a local money manager as the "doyen" of multimanagers. M Cubed was set up in 1995 and offers domestic bond and equity investment, said Anne Cabot-Alletzhauser, executive director. The firm uses SEI for international mandates.
And a number of local money managers have been expanding their services with manager-of-manager products. Old Mutual Ltd., Cape Town and Momentum Life Ltd., Johannesburg, have launched manager of manager programs within the last year. Investec Asset Management Ltd., Johannesburg, plans to launch a manager-of-manager range for both retail and institutional clients later this year, said Lara Price, head of multimanager research at Investec.
Some sources are concerned, however, that not all managers of managers offer the same type of service.
There are mutterings in the industry that some firms professing to offer manager-of-manager approaches simply split the assets among a few balanced managers rather than attempting to blend the styles of different managers to ensure diversity.
While demand for managers of managers likely will continue to grow over the next few years, Mr. Gordon warns there might be some consolidation in the industry.
"There is lots of potential, but not everyone entering the market will make it. We welcome the competition, but I am not sure if they will all still be here in a few years.
"For some companies, setting up a manager-of-manager product is a defensive strategy," he said.