LONDON - The Post Office Pension Plan, one of the United Kingdom's largest pension schemes, is putting the finishing touches on a core/satellite investment strategy that could see its trustees juggling up to 15 external money managers.
The final piece in the investment puzzle likely will be placed by March when trustees for the œ18 billion ($26 billion) plan appoint managers for private equity mandates amounting to œ500 million.
In mid-November, trustees will choose a manager from a shortlist of three for a œ150 million Japanese high-risk active equity mandate. The decision will not be announced until December, said Michael Duncombe, chief executive at Post Office Pensions Trustees Ltd., London.
Other appointments made in the past two months include:
* Merrill Lynch Investment Managers Ltd., London, to a œ400 million active "high-risk" U.K. equity mandate;
* Baillie Gifford & Co., Edinburgh, to a œ400 million "high-risk" U.K. equity mandate;
* Lazard Asset Management Ltd., London, to a "high-risk" active European equity mandate; and
* Alliance Capital Ltd., London, to a œ350 million "high-risk" active emerging markets equity mandate.
Sources close to the fund said INVESCO Asset Management Ltd., London, likely will win a œ130 million "high-risk" U.S. equity mandate that will be awarded next month. The fund decided to drop incumbent UBS Brinson because it had too strong a style bias and did not fit the new asset allocation for the specialist mandates, said Gerry Degaute, director of finance.
Neither Mr. Duncombe nor Sarah Bates, INVESCO's head of institutional marketing, would comment on the new appointment.
The trustees will tackle the allocation to private equity early next year.
`A question of style'
"We are not looking for managers yet. It's more a question of style. Do we take a fund-of-funds or gatekeeper approach, or do we invest directly? We will not seriously think about it till the new year," said Mr. Duncombe.
Chances are that Hermes Investment Management Ltd., London, will be one of the chief beneficiaries of this private equity windfall. The Post Office plan already invests slightly less than œ100 million in private equity with Hermes.
Trustees of the fund began searching for new managers after adopting the recommendations of an asset-liability study drawn up jointly by consultant Watson Wyatt Worldwide, Reigate, England, and Hermes, which manages the bulk of the scheme's assets and always has had a close relationship with the Post Office plan.
The study was adopted in April after the Post Office merged its two existing defined benefit plans in order to enhance returns and adopt a more aggressive investment policy.
Trustees for the fund had set themselves what one official described as a "Herculean" timetable to implement the new investment strategy by the end of the year, but it seems they will be successful.
According to risk
The fund is now 70% passively managed by Hermes. The balance is divided into specialist portfolios according to regional asset classes; mandates are then subdivided and allocated according to risk limits.
The aim is to appoint a range of specialist managers with different style biases and risk profiles in all asset classes in order to create a style-neutral asset allocation and diversify manager risk, according to Mr. Degaute.
North American equities now account for 6.7%, or œ1.2 billion, of the fund and are split into six mandates: Hermes runs the core U.S. large-cap passive mandate and a passive portfolio of Canadian equity; Wellington Management International, London, is responsible for an active U.S. medium-risk equity mandate; State Street Global Advisors U.K., London, runs a small-cap passive mandate; Foreign & Colonial Management Ltd., London, is responsible for a small-cap active mandate; and a new manager will be appointed to the œ130 million high-risk active portfolio of U.S. equities.
Half of the fund remains invested in U.K. equities, but the allocation has been similarly split into six mandates. European equities account for 8.1% of the fund and government bonds make up 10%.
Unusual mix
According to Roger Urwin, global practice director for Watson Wyatt Worldwide, the Post Office plan's asset allocation is unusual for a U.K. pension fund because it is based on intense risk budgeting and is designed to ensure that the core passive mandates are complemented by more aggressive specialist mandates.
"The Post Office has made a virtue of appointing managers with a higher risk approach," he added. Most other U.K. pension plans using a core/satellite approach tend to stick to low to medium tracking error limits when risk budgeting for their specialist mandates.
But such a strategy only could work with sufficient resources to monitor the managers and ensure they are doing what they were hired to do.
"Once you have a full-time staff able to monitor the situation and visit the fund managers, then these sorts of complicated arrangements are possible," said Kerrin Rosenberg, partner in the investment practice at Bacon & Woodrow, London.
He warned that diversified style-neutral investment modeling tended to be based on a money manager's past performance and style.
"There is no substitute for looking at the actual stocks and monitoring on a stock-by-stock basis. That is the only way to build up a picture of the style of the manager," he said.
