With a few exceptions, most pension schemes do not go overboard with the number of asset management products they use.
Having worked with some super-large, super-complex pooled schemes and fiduciary managers, I can understand at least one reason. Lots of products means lots of complexity, a higher technology and skill burden, more people, more communication with suppliers; the list goes on.
It all adds up, and the executive roles at the largest asset owners are very serious jobs indeed.
But as our data show for the vast majority of schemes, the number of mandates does not increase linearly with scheme size, and the curved line of best fit is asymptotic somewhere between 50 and 60 products/portfolios, regardless of size.
Something else stands out, and that is the shift from the use of pooled fund structures to segregated, at least for alternatives, active equity, fixed income, multi-asset and property.
What is clear is that segregated mandates are the domain of the large pension schemes, mostly those with more than £1bn assets under management.
For example, the average size of an active equity segregated mandate for schemes with more than £5bn of assets is £450m, compared with £11m for a pooled mandate for schemes with less than £100m AUM.
Indeed, having sizeable segregated mandates is what allows large schemes to reduce the number of products they hold.
Are pooled clients getting a good service?
Received wisdom is that smaller schemes use pooled funds for most strategies because they have some upsides that make them appealing: they allegedly provide economies of scale and deliver efficiencies of trading and custody, especially for multi-market or multi-asset products.
But they also have downsides, including a potential to be less tax-efficient than segregated funds, a loss of the right to vote according to a specific preference (my point from last week’s article), and an inability to set bespoke requirements.
In addition, very large funds are known to have diseconomies of scale. Large trades move markets, and in this world of MiFID II slippage capture, it seems only a matter of time before such diseconomies are exposed (I have not examined the data for this yet).
Poor Q1 returns catch up on risky fiduciary managers
Fiduciary managers with heavily equity-based portfolios suffered the heaviest losses in the first quarter of 2020, as the wide variation in strategies continues to provoke discussion about the right level of growth portfolio diversification.
At the level of the scheme at least, I do not see any real diseconomies of scale caused by a relatively heavy use of segregated mandates over pooled fund mandates. But neither do I see any scale economies.
However, I do see a trend for larger schemes to perform better. It is a complex thing to discuss as it involves both asset allocation, scale and all sorts of other variables. So I will restrict my comments to looking at the existence or otherwise of scale economies at the level of strategies next week.
Dr Chris Sier is a founder of AgeWage, chair of ClearGlass Analytics and led the FCA’s Institutional Disclosure Working Group
One other advantage of segregated mandates is an ability to access investment income cash via custodians, without having to sell units in pooled funds or be subject to the vagaries of distributable reserves within pooled fund vehicles.
There are strong arguments for large DC defaults to operated on segregated mandates. I think NOW is set up as such and NEST seems to be heading there. Does anyone know of any other DC funds that are or are about to move to a segregated mandate – I know too little about the large consultancy based master-trusts like Lifesight