Equity teams within large pension funds are now bearing the brunt of concerns over costs and the continued underperformance of traditional stock picking.
While the move toward quantitative and passive strategies from active equities is nothing particularly new, the impact of an almost 11-year bull market — albeit one that is being challenged by the current COVID-19 virus outbreak — is forcing asset owners to make big decisions over active exposures that are run in-house.
"In-house teams have been hit by many challenges in the past few years," said Matt Scott, senior investment research specialist at Mercer Ltd. in London. While asset allocators continue to lower equity allocations — and therefore the dollar value of any active returns — "the fixed cost of the management team remains the same," he said.
Over recent months a number of high-profile asset owners have made moves out of active equities and into other equity exposures, including quantitative and systematic allocations. And in some cases these decisions have led to a reduction in headcount.
"What has also come up consistently in surveying plan sponsors is that the biggest or second-biggest concern is cost management," said Jonathan L. Doolan, Frankfurt-based principal, head of Europe, Middle East and Africa at Casey Quirk, a practice of Deloitte Consulting LLP. "We've seen a reduction in total headcount at plan sponsors, and therefore they have to do more with less."
Last month, the £68 billion ($88.1 billion) Universities Superannuation Scheme, London, said it was planning to overhaul the investment approach for about £14 billion of internally managed developed market equities — about half of its listed equities allocation.
Wholly owned investment subsidiary USS Investment Management plans to "reshape" its developed market equities portfolio toward a "longer-term thematic approach which better leverages its internal investment capabilities in matching its pension liabilities," said a statement. The fund's 2019 annual report for the year ended March 31 showed a funding ratio of 92%.
USS said about half of its public equities portfolio would transition away from traditional stock picking, with BlackRock Inc. hired as transition manager to oversee its Japan, U.S. and pan-European allocations, while the change in investment approach takes place. The statement said the decision did not reflect equities' performance.