Contents. 1. In the news 2 2. The macro environment The LDI landscape Fiduciary management People watch.

Transcription

1 Contents 1. In the news 2 2. The macro environment The LDI landscape Fiduciary management People watch. 16 Q3 12 ASSET MANAGEMENT. MARKET OVERVIEW 1

2 In the news UK Pensions Increasing Deficits, impacting performance From June to July 2012, the aggregate deficit of the PPF s pensions fund index of 6,432 schemes, rose from - 267bn to - 283bn. Over 84% of UK pension funds are in deficit and this increase represents a 5.9% expansion of the black hole and a major problem for scheme trustees and advisors. However, it also represents a significant opportunity for asset managers and consultancies. In the news A recent report by Morgan Stanley has highlighted the impact of unsustainable deficits on UK public companies. By comparing the share performance of the top 20 publicly listed firms with the largest pension fund deficits by ratio of market capitalisation, and comparing them to general index performance, these firms under-performed the benchmark by 28%. It is also interesting to note that the underperformance was measured at 27% within Europe. Thomas Cook Group has the largest deficit as a % of markcap at 218.8%, followed by Premier Foods at 161.7%. Pension funds find alternatives to retendering According to a recent survey of 2400 pension funds by IC Select, there has been a 44% decrease in the number of firms re-tendering their investment consultancy providers. The reasons given for this significant drop were the increase in take up of the fiduciary management model and also schemes internally reviewing their investment advisor on an annual basis, rather than by the more expensive method of market-testing. The survey also found that almost half of all re-tenders resulted in the scheme switching its advisors to another firm. Recent fiduciary management mandate wins The 400m Wessex Water pension fund mandate, with its 3,000 members, was awarded to Russell Investments in July. Wessex cited Russell s range of investment disciplines, as well as its investment management and implementation expertise, as reasons for awarding. Brewers, (painting & decorating supplies company), has awarded its two schemes totalling 108, to SEI. Mercer has been appointed as the Fiduciary Manager for Roche, adding a further 500m to its 12bn fiduciary portfolio. 2 3

3 GSAM strongly denies Vervoer claims Goldman Sachs Asset Management has suffered further damaging accusations in their defence of the 250m high court suit from former client Vervoer, the $11bn Dutch pension fund. It is claimed that whilst GSAM was acting as fiduciary manager to Vervoer in 2007, they took too long to transition the investment which Vervoer had requested, resulting in a loss to the fund. The most recent Vervoer allegations to emerge from the court papers is that between 2007 and 2008, GSAM was investing their client s funds into a sub-prime mortgage-backed securities, whilst Goldman s prop trading desk was shorting the same fund. GSAM is defending the claim and strongly denies the allegations regarding its trading and investment units. BlackRock expands its alternatives with Swiss Re acquisition BlackRock s fund of funds group has agreed to acquire Swiss Re Private Equity Partners, citing the low yield, high volatility environment as a reason to build out their alternatives exposure. SRPEP is a European-focussed infrastructure and private equity fund of funds, although it also operates out of New York and Hong Kong. BlackRock have suggested that there will be very few changes to the investment style and management of the business. Lehman awards $3bn to BlackRock Lehman Brothers Holdings has appointed BlackRock Solutions advisory group to manage approximately $3bn of loans it offered to companies before filing the bankruptcy in September WCAS Fraser Sullivan Investment Management was previously managing the loans, which are generally related to high-yield, high-risk companies, having been awarded the mandate by the bankruptcy court in August BBC pension scheme de-risks with LGIM August saw the announcement from the Trust pension scheme that in the 12 months to March 31 st 2012, its deficit almost doubled to 2.6bn, having seen its liabilities increase from 10.3bn to 11.9bn. This came despite a modest rise in its portfolio from 8.9bn to 9.3bn. They awarded the 1.6bn LDI mandate and UK government gilts management to LGIM, from BlackRock. However they hired BlackRock to manage two passive equity mandates worth 228m. Overall, however, the scheme will reduce its exposure to equities from 45% to 42.5%, having already reduced it in the past 12 months from 48%. Environment Agency restructures pension portfolio The maturing Environment Agency pension scheme achieved an impressive return of 5.1% in 2011 and has been following a de-risking strategy for the past decade. It now seeks to overhaul its strategy and the latest significant re-allocations will see continued reduction in its exposure to equities of all classes, currently representing around 63% of the 1.9bn fund, as well as government bonds which are around 15%. However, the fund is planning to significantly increase its holdings of corporate bonds by reducing exposure to government bonds and increase its alternative investments in property and private equity, currently accounting for around 3% and 5% respectively. It says it will continue to develop its sustainable investment policy and reduce its carbon footprint. Mercer puts emphasis on ESG The results of the Mercer survey on behalf of three global climate change organisations in July, showed that more than 75% of asset owners will consider climate change when selecting asset managers and more than half conducted formal or informal climate risk assessments of their portfolios. As a result of their findings, Mercers has now decided to add environment, social and governance (ESG) ratings to their manager search and performance reports, globally by the end of

4 The macro environment Global Outlook - equities Global equity markets continue to be volatile with volumes declining across the board, globally. More column inches are being devoted to job cuts within investment banking, although asset managers began a trend of moving away from equities, long ago. Monthly US equity trading volumes are down almost 50% year on year from 2011 and are at their lowest monthly average since The macro environment. European indices are also experiencing large falls with the value of European equities traded in H1 2012, down 14.3% on H1 11. This has resulted in shifting strategies from Asset Managers, who are allocating an increasing proportion of capital toward fixed income, alternative investments and ETFs. Alliance Bernstein has lost around 90 staff so far this year within their equity business, including Richard Nelson; Head of Dealing EMEA, and from 2008 to 2011, fixed income rose from 37% to 53% of AUM. Aviva Investors has reduced its exposure to European, emerging market, global and sustainable investment desks to focus on its active and quantitative UK equity desks. ETFs show promise While global indices languish in the doldrums, Exchange Traded Fund trading volumes have held steady, and are set to steadily grow, according to a study by Lyxor Asset Management. ETFs have accounted for roughly 9% of all European equity trading in H The rise in popularity of ETFs as a hedging investment tool can be seen in trading on the Dax. In June, standard equity trading fell 14% compared with June 11. However, trading volumes in the six main ETFs which track the indices, rose by 1%. According to BlackRock, the global ETF market witnessed record inflows of more than $100bn during H1, rising 16% from H

5 Global Outlook fixed income Over the last quarter interest rates in core markets, such as the US, UK, Germany or Switzerland - the safe havens of the world - has dropped at or below record lows. GDP growth in the emerging European nations also compares favourably with the figures from elsewhere in Europe. We believe that the reasoning for such a dramatic move can be summarized in three factors: The outstanding universe of safe assets has been declining over time with more and more countries dropping out of that list - while a Year ago the US supplied 35% of the world's "risk-free" assets, it now accounts for 75%. Financial repression is present in many countries, as monetary authorities worldwide are trying to force banks/institutions/investors into bonds. The manipulation of normal market forces is one significant driver behind the record low yields in core markets. The fear or weaker economic data, slower growth and dropping consumer confidence, resulted in increasing interest in government bonds as a place to park money and avoid being invested in the equity markets. Investment grade bond funds have seen massive inflows over the course of the year. Corporate bonds Pimco, the global bond leader is actively reducing its exposure to US corporate high yield debt, which has been the best performing US fixed income market in Government bonds The bond markets in this quarter have been dominated by the Eurozone crisis and the unsustainable rates for high-debt nations. Whilst the UK and Germany enjoy near zero yields, Greece, Spain and Italy continue to hover close to the brink. Asset managers have a difficult time in assessing the ECB strategy on managing the crises with stimulus and how to allocate exposure to the peripheral nations debt. BlackRock has begun adding Spanish government debt in the quarter but admits that this increase is tentative. Central and Eastern European bonds have attracted investors in the first six months of the year, thanks to relatively stable debt levels as a % of GDP and low and stable budget deficits 8 9

6 The LDI landscape As borders continue to be eroded between the business models of consultancies and asset managers, the ability to become specialists at stemming the bleeding becomes increasingly crucial. As this trend shows no signs of abating, especially given the ongoing Eurozone crises, slowing global demand and a low interest environment, the largest UK asset management firms are allocating increasing headcount towards LDI. The general consensus is that de-risking strategies are here to stay for pension funds. The LDI landscape. The largest three LDI providers; BlackRock, Insight and LGIM, who between them control more than 80% of the 240bn UK market, have all added headcount across the quarter as demand for these products increases. BlackRock are currently going through an organisational restructure, having lost their Head of LDI; Tarik Ben Saud in June. Robert Hayes has assumed oversight of the 30-strong team, with John Dewey being promoted to lead the team. From the second tier LDI providers, Schroders are building aggressively in their pursuit of expanding the Big 3 to Big 4 by making a string of acquisitions in the past 12 months including Kathleen Broekhof from HSBC Global Asset Management as an LDI solutions manager, Marcus Durell, formerly of RBS, as a structured solutions specialist, and Ian Maybury from pensions consultant Redington as its Head of solutions management. There is anecdotal evidence from the market that F&C, having settled down from their investor spring, are gathering momentum in LDI and are making plans to grow again. F&C have also been the first to market with an LDI fund for defined contribution schemes, although Schroders and an LDI fund for defined contribution schemes, although Schroders and Axa are both planning to launch similar products this year. This seems to be a growing area of interest for LDI providers, as they keep an eye on the growing area of DC under auto enrolment. Axa have been the most recent new entrant, having acquired Shalin Bhagwan and Lucy Barron. Headed by Pascale Christory, Axa are seeking to leverage their extensive European insurance and investment relationships, into London. They 10 11

7 themselves admit that this is an ambitious target but feel confident that they can build a manufacturing business in London and take market share. State Street, having completed the launch of their LDI funds, have lost a number of key employees seen as crucial to their required success in the market. Ben Clissold leaves SSgA less than a year after joining from Pimco where he was deputy CIO, he will join BlackRock in their LDI team reporting to Robert Hayes. Also departing is Scott Macmillan who was Head of Relationship Management, along with two members of his team including Moira Gorman who joined Threadneedle. Fiduciary Management

8 Fiduciary Management implement a fiduciary management model and 77% of these chose their existing consultant to be their fiduciary manager. Start a debate on fiduciary management and you quickly discover opinions that are poles apart. Asking which is better, traditional consulting or fiduciary management, is focusing on the wrong question, the debate needs to move on. Fiduciary management in itself will not solve or change any of the current problems faced by trustees, rather, the challenge is to identify a governance and risk management framework that fits with the needs of the scheme and suits the way trustees want to work. Understanding how the governance and monitoring requirements differ between traditional consulting and fiduciary management is the natural next step to making the best of the chosen solution. The previous year s results showed only around 10% of traditional consulting relationships were terminated for an FM mandate. These figures seem demonstrate the challenge set by traditional consultancies to asset managers seeking to gain share in the FM space. As one of the leading providers of FM services, BlackRock is currently undergoing an extensive reorganisation across its business and its Fiduciary Management business will be re-configured. Currently sitting within it BMACS (BlackRock Multi Asset Client Solutions) team, it will now be bundled together with the client strategy groups for US, EU and Asia as well as the LDI team. The key to managing through the current financial predicament is to maintain an integrated and joined up approach. Trustees funding and investment strategies have always needed to be aligned. In the current climate they also need to be realistic in acknowledging the risks involved if the assumptions made do not play out over time. Provided a firm has been through the right process and due considerations, there is significant flexibility in a Fiduciary Management to deal with a wide range of funding approaches. It is for this reason that we see growth in the sector and why many of traditional Asset Management firms are looking at this very seriously as an area to develop. BlackRock feels that offering a more integrated approach to Fiduciary Management with closer links internally and client facing, will streamline its approach and leverage its largest relationships. Michael Heubsch, formerly Global Managing Director of BMACS, will lead the new, enlarged division. Finally, Financial News recently announced its five nominees for FM Firms of the Year award 2012 which includes Russell Investments, BlackRock, PSolve, Cardano and Towers Watson. The winner will be announced at an awards ceremony on 10th October 2012 at the Royal Courts of Justice in London. Fiduciary management continues to be a key growth area for the asset managers and investment consultants in the UK who offer such services. A recent survey by Russell Investments found that of the two thirds of the UK funds which do not currently use a fiduciary manager, nearly 40% are considering using one in the next 12 months. This quarter has seen a continued rise in activity in the sector and the awarding of three large pension mandates totalling over 1bn of assets. According to a recent survey of 2,400 schemes by IC Select, 23% of pension funds who terminated their existing relationship with an investment consultant did so to 14 15

9 People Watch Investec Asset Management has hired Michael Spinks from Schroders, as it plans to increase its multi-asset offering. He will head Investec s UK-based multi-asset offering and will work with global head of multi-asset investments Philip Saunders. Permal Group has appointed Katie Jupp, a specialist in alternative strategies, as Institutional Business Manager, focused on the UK market, including investor and client relationships. She moves from Sussex Partners where she was an Associate Director. Jane Newell, chair of the Royal Mail Pension Scheme, has announced that she will step down at the end of September following the transition of the bulk of the scheme to the UK government. The scheme will now have around 2.5bn of AUM. Gerry Degaute, the Chief Executive, has previously announced his decision to move on in 2013, after 26 years with the organisation. Andrew Terry leaves BlackRock where he was as senior client advisor of the asset management company's insurance services team. Having previously worked at BlackRock's financial institutions group, Terry will be part of the development of the general account insurance practice's client service. Barings Asset Management has appointed Christopher Mahon as director of asset allocation research in its multi asset team. He will provide strategic recommendations for asset allocation to the multi asset team as well as sitting on the strategic policy group, the company s global macro research and asset allocation committee BAM has also hired Mike Levy as senior investment manager for its Europe, Middle East and Africa equity team. Allianz Global Investment has appointed Corinne Crawford from M&G, as a director in its consultant relations team. She will focus on UK consultants, having held a similar role with her previous employer. PensionsFirst has appointed Hugo James as chief executive of its insurancebased risk transfer business where he will be responsible for running PensionsFirst 16 17

10 Capital targeting larger pension schemes for transactions involving 500m of liabilities or more. He was previously managing director of fixed income at Credit Suisse, where he led the insurer's 1.7bn longevity swap with the ITV scheme. However, Hermes did lose a member of their team when Malcolm Gordon left to become head of UK Institutional Client Relationship Management for UBS Global Asset Management. BlackRock has appointed Justin Brown as Managing Director Portfolio Manager within the UK Property Fund. He was previously Executive Director Global Real Estate with UBS Global Asset Management. They have also hired Mark Long from OL&H Real Estate Consultants, as Director of research within the UK property team. He will oversee research, strategy and analytics for the 2.1bn UK Property Fund, which invests in a diversified portfolio of UK commercial property assets, as well as other real estate accounts managed within the EMEA region. Schroders has hired portfolio manager Bob Jolly from UBS Global Asset Management, into a new role to lead a push into a strategy similar to global macro. He is due to begin in September and he will lead a team of 10 people. It will involve taking on responsibility for existing mandates involving $15bn of assets, focusing on sovereign debt and absolute return strategies. Judy Saunders has bravely jumped the fence from client side back to sell side by swapping her role as Chief Investment Officer of the West Midlands Pension Fund, for Man Group, where she will be a Senior Adviser to its institutional team. Scottish Widows Investment Partnership has appointed Peter Marsland as Client Director where he will have specific responsibility for providing specialist support for pension fund clients using SWIP s providing de-risking solutions. He joins from insight where he was a Client Director. Hermes has continued its push to gain net inflows of AUM by making five senior appointments to its business development team. Rob Page who has headed up marketing teams at Barings, New Star and Ignis Asset Management during his 25- year career, joins from Ardevora Asset Management as Head of Marketing and Communications. Paul Voûte joins from GE Asset Management as Director European Business Development where he will be to promoting Hermes strategies across the Benelux region and other Northern European markets. Melissa Whitney joins from Marblegate Asset Management to specialize in Alternative Strategies with particular emphasis on the US market. James Lucas becomes director of Institutional Business Development, arriving from Henderson where he was promoting solutions in equities, fixed income hedge funds and other alternatives. Clive Selman has been hired from Man Investments to become Director of UK Wholesale