Evercore Pan Asset

Many of the larger investment funds we talk to, charities and pension funds, employ several managers. This can bring them the benefits of different approaches to investment. There is no one right way of investing money. Multi manager approaches can provide diversification. When one or more of the strategies goes wrong, one of the others might work. Even in 2008 when private equity, property, and quoted equity of most kinds went down all round the world, a government bond portfolio made money.

There are two main disadvantages to using lots of managers. The first is cost and complexity. You spend more monitoring them and meeting with them. They each need to charge you percentage fees based on the amount of your money they manage, rather than based on the full size of the total fund. This will tend to increase the fee substantially.

The second is you can lose control over what really matters, the overall asset allocation. If you are hiring good managers whose skills you rate, you will usually give them considerable discretion. Your equity managers may have discretion over which parts of the world to be invested in. They may have some discretion over whether to be fully invested or not. Your bond managers may have discretion to be long-dated, taking lots of risk, or short-dated, taking much less. You may have managers who can mix how much they have in property, equity, cash and bonds as they make their judgements. At any given time you may have Manager A selling UK shares, and Manager B buying them, as a matter of policy. Those disagreements make a market, but your fund may be incurring some of the costs of both contradictory judgements.

So what can you do to improve the position, whilst maintaining the best of your managers?

We have thought long and hard about it at Evercore Pan-Asset. We are now offering a strategic asset allocation advisory service, allied to investing a balancing portfolio for the larger funds, so they can regain some control over the overall asset allocation and cut the costs of active management on a portion of the fund.

An example shows how it could work. Let’s take the case of a £400 million pension fund. This fund currently has six different active managers and an Investment Consultant. If the fund allocated £100m to us to run as a balancing portfolio, all six existing managers could be kept if they are doing a good job within their sectors and markets whilst all surrendering one quarter of their money under management, or the decision could be made to drop one or two of them if their performance is poor.

We would offer advice on the best disposition for the total fund, and would then calculate what the balancing portfolio should hold to bring the overall fund into that shape. The active managers would not be asked to change their approach or their asset allocations, but would just keep us informed of any major changes that could affect the overall balance, so we could adjust if necessary. In recent months we have favoured substantial investment in Asian and emerging market equity, usually placing around one third of the portfolio in such markets. The typical UK pension fund has around 5-10% in these areas, so we would have used the balancing fund to increase the overall weighting, probably using all the fund for such investment. In 2008 we recommended extreme caution, and would have usually suggested 100% of the balancing fund being in money market instruments or on deposit or in short-dated bonds.

We could quote an overall fee for managing the £100 million in indexed vehicles which would usually offer a good saving on active management of that money, providing the investment allocation advice as part of that service within that fee. In the case of our £400 million fund, we would be happy to work with the Investment Consultant, who could still offer independent advice about our performance and stance, as well as helping with active manager selection.

We suspect in some cases over the years Trustees and Investment Committee members would come to like the influence it gave them over the direction of the fund, and the costs savings on active management. Committee meetings could concentrate much more on reviewing the overall shape of the portfolio, and on the big picture decisions which determine how well the fund does. The Committee would be in receipt of continuous professional advice on asset allocation. If something important happens, as it did in August 2007 when the money markets froze, the fund would have a chance to respond quickly. Too many large funds only take allocation advice once in a while when it may be too late for the last disaster and too soon for the next.

If Trustees do grow to like this approach, they can always increase the size of the balancing fund, saving more fees.