SAN FRANCISCO — Barclays Global Investors is moving into the defined benefit outsourcing arena.
The firm plans to manage and oversee entire plans, a move officials say will kick off in the second half of the year. But unlike most of its competitors, it will primarily place assets into in-house active and passive strategies. The firm plans to eventually offer access to outside managers.
Outsourced pension plans will have access to BGI’s indexed as well as more sophisticated strategies like long/short equity, hedge funds and liability-driven investing.
Industry experts said outsourcing has gained momentum, driven largely in part by the 2006 Pension Protection Act and accounting changes that force a fund’s liability on to a corporation’s balance sheet. Pension portfolios are also becoming increasingly complex as investors incorporate alternative investments and consider LDI strategies.
As managing a pension fund becomes time consuming, officials at companies that were likely to freeze their defined benefit plans can instead outsource the management of the system and focus on their core businesses, said Matthew Scanlan, managing director and head of BGI’s America’s institutional business.
“I think we are really seeking to preserve the best form of retirement security,” he said.
The DB outsourcing business will be a small part, at least initially, of the $1.8 trillion asset manager’s overall business and Mr. Scanlan could not provide specific growth targets. Likely clients will be corporate pension funds with less than $2 billion in assets.
With the new service, called PensionSpan, BGI will offer strategic advice, act as a co-named fiduciary regarding asset management and work with the fund’s actuary to determine the fund’s risk profile. Investors Bank & Trust Co., Boston, will serve as trustee and take on administrative duties like benefits payments and accounting.
A natural move
This is a natural extension for BGI, which, as one of the largest money managers in the world, already offers a slew of investment portfolios and employs in-house strategists, said Stephen Bozeman, a principal at BGI. He would not discuss the fee structure for the outsourcing program.
BGI will be up against several large players already in the market, including SEI Investments, Oaks, Pa.; Northern Trust Corp., Chicago; Russell Investment Group, Tacoma, Wash.; and Fidelity Investments, Boston.
Most of the competitors run a manager-of-managers business or offer a sort of hybrid solution, where indexed assets are run in-house and external managers are found to generate alpha.
As a pure money manager, BGI needs to deal with a potential conflict, said Jim Morris, senior vice president at SEI’s global institutional group. “Where do they use their own products and where do they use outside money managers,” he asked.
He added that the issue is not a big one for indexed portfolios, because the differences in cost and performance among index providers are not great.
About $40 billion of SEI’s $181.5 billion in institutional assets under management are part of an outsourcing agreement. In 2006, SEI brought in 65 new outsourcing clients with $5.8 billion in global assets. The firm uses outside managers for all portfolios, said Mr. Morris.
Northern Trust manages only passive portfolios internally, said Jennifer Tretheway, executive vice president and director of the manager-of-managers services at Northern. The firm had 48 clients with $18 billion of outsourced assets at the end of 2006, she said. That’s up from about $13 billion in 2005.
“Most clients don’t want even the perception of a conflict of interest,” said Ms. Tretheway.
No conflict of interest
For its part, BGI officials say there is no conflict. “The question a client might ask is: Will I be disadvantaged by having investment options from only one manager? It’s a valid question,” said Mr. Bozeman. The firm hired an independent company to survey clients and consultants to gauge their reactions to a potential outsourcing business. Concerns about conflicts of interests never came up, he said.
“Based on the breadth and strength of our product set — efficient beta exposure across virtually all asset classes and consistent alpha delivery across long-only and long-short strategies — we don’t believe a client would be disadvantaged by having investment options only from BGI,” said Mr. Bozeman.
Widening the scope of managers used is in the works, he said. The firm already offers a hedge fund of funds, but does not have the manager research capabilities in the more traditional asset classes.
“As the business evolves, we will add best-in-class third-party managers to the platform when and if we believe we have the ability to identify them, and can add them to the platform in a cost-effective and efficient manner,” said Mr. Bozeman.
