UK pension funds are diversifying their sources for researching and selecting investment managers, reducing their long-standing dependence on mainstream asset consultants. Or so argues Lake Shore Asset Management, a specialist in exchange-traded derivatives that sponsored a survey to determine the attitude of UK pension schemes to specialist managers, and their approach to research and selection of managers in general.
Conducted in May by Pensionsnet, both on-line and by telephone, the survey received 103 responses from both public- and private-sector schemes, including 67 of the 150 largest UK funds, with assets of 1 billion or more at the end of 2005.
Big or small, over 51% of all respondents said they rely exclusively on external consultants to seek and select third-party investment managers. A further 24% rely on consultants to a greater or lesser extent, while 23% used only in-house resources to pick managers.
“This last figure is surprisingly large for an industry long regarded as dominated, in the UK, by the major asset consultants,” says Lake Shore. “However, this needs to be judged in the context of a survey response that was heavily skewed in favor of the bigger, better-resourced, schemes. It may also reflect the fact that these include a high proportion of mature plans, where passive or indexed management of a relatively modest equity exposure combines with in-house management of cash and fixed-income assets to minimize the need for external search and selection advice.”
However, closer examination reveals other causes for the large number of schemes eschewing consultants, says Lake Shore. The 25 respondents using consultants to some degree, but not exclusively, constitute a broad church with some intriguing new, or relatively new, under-currents. Chief among these is increasing adoption, especially among the 37 public-sector respondents to the survey, of EU-approved tendering, with tenders posted in the Official Journal of the European Communities, usually referred to as ‘the OJEC.’
Sometimes, says Lake Shore, the schemes’ consultants vet the proposals received, but a growing number are referred to ‘pay-to-play’ organizations, which charge the managers for collecting information from them. This is used to create short-lists that meet the tendering schemes’ requirements, with final selection made by the schemes alone. Tender-winning managers usually pay a proportion of their income from such mandates to the intermediating pay-to-play firms, but pension funds get the full research and short-listing service gratis.
Another driving factor in the declining role of mainstream consultants in manager selection is growing interest in so-called alternative assets, especially property, private equity, and funds-of-hedge-funds (in that order, according to this survey), says Lake Shore. Virtually all respondents claimed an exposure to one or more of these asset-classes, and 60% said they will (16%) or might (44%) increase that exposure within the next 12 months. Moreover, several schemes expressed dissatisfaction with advice on alternatives from mainstream consultants, thereby explaining the advent of several names well-known for advice to foundations, private banks, and other habitus of the alternative-assets scene, but hitherto new to UK institutional asset consulting.
“Greater competition and choice in the consultancy input to UK pension schemes can only be good news, ultimately, for investment performance and costs,” says Sebastien Sainsbury, a London-based director of Lake Shore. “It is certainly good news for specialists like Lake Shore, anxious to bring better-performing investment solutions, at lower cost, to the attention of such institutions.”
The Lake Shore Group was founded in Chicago in 1993 and has become a major CTA (Commodity Trading Advisor). Despite this classification, it invests mainly in discretionary pooled and segregated accounts in exchange-traded derivatives based on major market indices, such as the S&P 500, FTSE, CAC, DAX, and Nikkei, and much less in commodities. Lake Shore’s London office opened in July 2005.