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Multi-managers on the menu

Most life offices which are serious about distributing pension products through IFAs now offer funds managed by outside investment houses as well as their own. It is almost a case of having to. Their competitors offer this facility and IFAs expect them to offer it too.

The offerings typically consist of UK and managed equity funds in the hands of the specialist fund management houses that tend to dominate the retail and institutional investment scenes.

This is really an adaptation of the multi-manager facility imported from the US and already used extensively by trustees and managers of big defined-contribution pension arrangements. But there is no reason why the major corporations should have a monopoly on the benefits that multi-management can bring. IFAs who have corporate clients with workforces numbering 100 or more should consider adding it to their product armoury.

Multi-management is available on all types of DC arrangements – stakeholder and group personal pensions as well as occupational schemes – and members are normally empowered to make the key investment decisions rather than have someone do it for them.

Three levels of diversification allow them to choose between the different asset classes (equities, fixed interest, property and cash) at level one, the main management styles (growth, value, small cap and so on) at level two and a selection of different fund management houses at level three. Multi-management is based on the concept that specialisation brings superior results.

Imagine that a major global asset management house possesses all the administration and communication capabilities needed to offer the various kinds of DC pension arrangements approved by the Inland Revenue. After consulting widely in the marketplace, it puts together a list of wish funds managed by other specialist firms. While some of these complement its own offerings, others are in direct competition.

It then negotiates terms and conditions with the selected external managers for giving members access to their specialist portfolios. However, the company is confident its in-house investment proposition is strong enough to win it a fair share of the management of any funds going. The end result is a master menu of around 50 funds. An employer, with its IFA on hand to provide guidance, will make its own selection, consisting typically of up to 10 funds, some managed in-house and others externally.

The master list is kept under constant review. New funds can be added and existing ones that do not come up to expectations removed. In making any changes, the pension provider will listen to the views of employers and their advisers.

The major global asset management house in our example decides to outsource the running of funds invested in two asset classes. The cash mandate goes to an associate company which is a specialist manager in this field. For members of a DC scheme, cash comes into its own at times of stockmarket turbulence and, in a lifetime switching programme, as a means of providing in advance for the tax-free lump sum. The actively managed cash fund has AAA ratings from Standard & Poor&#39s, Moody&#39s and Fitch IBCA and aims to meet the three key demands of high security, daily liquidity and a competitive return.

The other asset class to find its way into the hands of an external specialist is property. Commercial property has a record of performance that is quite distinct from that of other asset classes. Rental yields have a history of steady upward progression while property values tend to follow a cycle all of their own. In some years, this is an asset class that outperforms equities and bonds. In others, it lags behind. Property fund management requires special expertise. As part of the multi-manager master menu, this is what it gets.

Our global asset management house is recognised primarily as a manager of active portfolios but appreciates there is both a place and a demand for passively managed funds. This is why its master menu includes not one but a range of portfolios tracking indices in national markets and on a global scale. These are available from an acknowledged master in this specialist field.

The master menu contains two external actively-managed equity funds which are run on socially responsible investment lines. Stakeholder managers and trustees have to provide a statement of investment principles while trustees of occupational schemes have to go one stage further as the Pensions Act 1995 requires them to include details of ethical investments and voting policies on the companies invested in.

Then we come to the mainstream actively managed equity and bond funds. There are more than 30 on the master menu. Nearly half are managed by outside managers and compete with the provider&#39s own range. There is no requirement to place at least part of the assets into the provider&#39s own portfolios.

This is a management house that has complete confidence in its ability to achieve critical investment mass on its own merits without having to resort to legal terms and conditions to tie money in. What is more, access to competitors&#39 funds is offered at the charges levied by those fund managers, with no additional charge.

A selection of lifestyle switching programmes enables members to migrate by stages from equities into a mix of bonds and cash as they near retirement. With these, too, there is freedom of choice. The default fund can be one of the provider&#39s funds or one of the competitor funds on offer. Employers or trustees – with guidance from their adviser – are free to choose.

To enable members to make the key decisions affecting their retirement future, the global asset management house offers an ongoing educational programme backed up by convenient and rapid access via a range of media to all the background data required for making an informed choice.

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