In-house managers looking out

ATP is the latest in-house investment unit in Europe to pursue outside clients, seeing fertile opportunities in the U.K. where its capabilities could attract pension funds coping with the shift from defined benefit to defined contribution plans.

“Right now, we're looking at two areas (in the U.K.): One is offering predictable, simple, low-cost DC products to companies. We know we can keep the process simple and efficient while providing complex, sophisticatced portfolio management at a low cost,” said Morten Nilsson, head of international operations at ATP, which manages the 418 billion Danish kroner ($77.5 billion) ATP pension scheme, Hilleroed, Denmark.

“The other is fiduciary management to pension funds. We've got a good track record of managing pension fund assets, particularly through the financial crisis.”

ATP Group, which already manages and administers pensions for nearly all of the Danish adult population, is now tapping overseas clients. The U.K., which is the largest pensions market in Europe with an estimated £800 billion ($1.26 trillion), proved an attractive target both for the nation's relative low rate of DC pension savings and the turmoil in its DB system following the financial crisis.

“ATP has a successful record of linking investment strategies to liabilities,” said a money management executive familiar with ATP, who asked not to be named. “Conceptually, they have a strong story to tell.”

ATP officials have not enlisted any external institutional clients in the U.K., but are in discussions with several to provide investment services. Mr. Nilsson declined to elaborate on specific services and to name those funds because negotiations are not finalized.

ATP, which opened a London office earlier this year, is considering expanding both its defined benefit and defined contribution plan money management operations. Other in-house managers — such as Hermes Fund Managers Ltd., owned by the London-based £33.9 billion BT Pension Scheme — have mostly focused on managing external institutional assets for other pension funds.

Paul Verdin, chair of strategy and organization at Solvay Business School in Brussels and editor of the recently published book, “Growth and Value Creation in Asset Management,” said the overall money management industry is going through “a drastic change” in which “the environment is going to be either fiercely competitive or brutally competitive.”

The reasons are twofold: A slow growth environment is expected to depress returns, putting pressure on fees; and, clients are demanding more bang for the buck, potentially leading to lower profits, sources said.

“It seems to me that in an environment like this, it will be hard (for in-house managers) to hold on to what they have, let alone go out and win third-party assets,” Mr. Verdin said in a telephone interview. “In order for there to be sustainable growth, these managers will have to show proven added value.”

At the same time, internal expertise has become more expensive, adding pressure on in-house managers to seek other sources of revenue and diversify their business model through external mandates. ATP in 2009 spent about 20 basis points on investment-activity expenses, three basis points higher than the cost in 2007 and seven basis points higher compared with five years ago, according to data from the fund.

“The challenge for any potential external client is that there will always be a question as to whether the manager's priority is with the in-house client,” said Mark Nicoll, investment partner at consultant Lane Clark & Peacock LLP in London.

In New York, General Motors Asset Management Corp. went so far as changing its name to Promark Global Advisors Inc. in 2009 in order to better position the firm to win external clients. However, earlier this year, the manager abandoned its efforts to provide money management services to external clients and reverted back to GM Asset Management (Pensions & Investments, Aug. 9).

Executives at Hermes themselves announced bold plans in 2007 to gain third-party assets. But so far, total assets under management have been dwindling, to £22.7 billion as of June 30, compared with £35.5 billion two years earlier. In the latest blow to the firm, the U.K. government's announcement in October to sell about 90% of Royal Mail will likely result in the liquidation of most of Royal Mail's £26 billion pension portfolio. As a result, Hermes probably will lose the bulk of some £3.4 billion it manages for Royal Mail, according to sources familiar with the issue.

Rupert Clarke, CEO of Hermes, could not be reached for comment by press time. However, a company spokeswoman said in an e-mailed statement: “Our ongoing business strategy has been to focus on third-party assets. ... This year we have boosted this by significantly increasing our sales resource and we are also in the final stages of completing the operational and investment infrastructure needed.” According to data provided by Hermes, the firm added about £2 billion in new asset inflows in third-party assets so far this year.

Mr. Nilsson of ATP added that his fund's advantage is its experience in knowing “how to get the objectives right for the members of the fund, and how to align them to the investment strategy and incentive structure.”

“I think investment banks and consultants are used to attracting third-party assets, so their sales process is much more developed,” Mr. Nilsson said. “But perhaps our lack of experience in marketing doesn't take away from what we have to offer: The key thing is getting the objectives right, which is something that many consultants and investment banks have not done” through the financial crisis.

In 2008, ATP returned -6% when many of its peers experienced double-digit losses. In 2009, the fund reported a 4.8% return. Performance for the first nine months of 2010 was 5.7%, according to data from ATP.

The move toward fiduciary management and chief investment officer outsourcing also might place ATP at an advantage to win such external mandates, Mr. Nilsson said.

“What struck me is that for many pension funds, the governance structure is such that it is difficult to make decisions and changes quickly,” Mr. Nilsson said, “and therefore, outsourcing of the CIO role might help to improve the investment process.”

ATP bid for the administration of the proposed National Employment Savings Trust, which is the U.K. government's proposed national DC plan. ATP had been prequalified as a finalist, but later withdrew its bid. (After extensive negotiations, ATP officials had “assessed that it would not be possible to provide the services on commercially viable terms,” according to a statement from the fund at the time.)

“But what we learned from the experience was that the (pension) reforms and the shift from DB to DC in the U.K. could be interesting” for ATP as it considers expanding, Mr. Nilsson said. Officials are discussing various options with potential clients, and are still in the development stages of the external management business, he added.

“We need to be able to make a profit for our members” if ATP manages external assets in the U.K., Mr. Nilsson said. Fund executives are also considering expanding to other countries that he declined to name on grounds it's too soon to announce such plans. ATP already manages outsourced assets in Denmark, including about 40 million kroner for the Special Pension Savings scheme, Copenhagen, a compulsory nationwide DC pension plan for certain adults who are self-employed or on social benefits.

Hamish Wilson, senior partner and founder of London-based independent consultant HamishWilson & Co. LLP, said in-house managers such as Hermes and ATP have established a successful track record in managing pension plan assets and should be able to win external clients in the current environment.

“I don't see any reason these organizations shouldn't get more business given that they have a clearly demonstrated skill set,” Mr. Wilson said. “The difficulty, I believe, is also one of marketing. ... They need to be able to package what they have to offer with clarity.

“In the U.K., they need to be able to do this either through consultants or directly to clients, who in many cases inevitably will revert back to (the advice of) their consultants. Getting past the gatekeepers is a major challenge.”