LONDON — U.K. pension funds are not hugging their stock market benchmarks as tightly as they used to do, according to an analysis by Hewitt Associates Inc.
During the past 18 months, Hewitt advised on 70 searches for unconstrained mandates involving about 17 managers and assets totaling "many many billions of pounds," Ian Peart, the London-based head of manager research, said in an interview.
"There's been an awful lot of interest from the (U.K.) pension fund industry, that's fair to say," Mr. Peart said.
The shift is partly due to a change by U.K. pension sponsors to think about investment returns from a liability standpoint rather than a benchmark. Therefore, many are turning to unconstrained strategies, which range from high-alpha, absolute return investing to long-term, long-only portfolios that ignore benchmarks to improve investment returns while reducing volatility. Shorting is also a feature, and some strategies combine not only equities and fixed income, but also hedge funds and other alternative investments.
Several managers in that run unconstrained strategies also noticed similar trends:
Active, unconstrained equity strategies accounted for 10 of 13 new institutional mandate wins totaling £620 million ($1.16 billion) so far this year for Invesco Perpetual, a subsidiary of AMVESCAP PLC, London. In 2005, 14 of 20 new mandates totaling £365 million were unconstrained, said Nicola Hayes, investment consultant director. As of June 30, Invesco Perpetual managed £28 billion in assets.
Morgan Stanley Investment Management, New York, began offering an unconstrained global equities strategy to European clients in 1996. "There was absolutely no interest from U.K. pension funds then," said Richard Lockwood, London-based head of U.K. institutional business. "We got our first (U.K. pension fund) client in 2003, and by 2005, we had to close (the strategy) to new institutional investors." The firm had $9.7 billion in the global strategy as of Aug. 31. Its unconstrained Japanese and U.S. equity strategies remain open to new investors. Overall, Morgan Stanley had $448 billion in assets under management as of Aug. 31.
Cedar Rock Capital Ltd., London, was launched in 2002 to specialize in long-only, unconstrained equities. By 2005, the boutique manager closed to new investors because of capacity issues, according to Nicholas Tingley, investment manager and one of three founders of Cedar Rock. As of Sept. 30, Cedar Rock had about $3.6 billion in assets under management.