New Dynamic Emerging Between Pension Funds and Asset Managers As Pensions Look for Lower Costs, More Transparency

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Many pension funds are moving portions of asset management duties in-house in a bid to reduce costs; many more funds are pushing for more transparency from their external asset managers.

In the wake of these trends and others, a recent State Street survey claims that a new dynamic is emerging between pension funds and their asset managers.

More details on the findings of the survey, from State Street executive Rob Baillie:

Many pension funds are looking for a new type of relationship with their asset managers. In interviews conducted as part of our research, pension funds stressed how important it was to find asset managers who can understand their objectives and investment philosophy. The ability to align interests around shared goals is also key to success in these relationships. More than half of pension funds (52 per cent) find it difficult to ensure their asset managers’ interests are tightly aligned with their own. By contrast, asset managers that can build solutions around their clients’ objectives can gain an edge in a highly competitive market.

Transparency is also a key differentiator. In today’s highly regulated environment, pension funds need granular information on the issues that drive risk and performance across their investments. This is a huge challenge in the multi-asset world: almost three out of five pension funds surveyed (58 per cent) say it is a challenge to gain a complete picture of risk-adjusted performance. Asset managers that develop the analytical tools and reporting capabilities to address this need will again have a huge advantage.


In recent years, many pension funds have decided to insource some of their asset management. This was one of the strongest findings in State Street’s survey of pension funds: 81 per cent said they intended to manage more of their assets in-house.

Insourcing doesn’t remove the need for external asset management, but it does create a new dynamic in the relationship between pension funds and their service providers. They are less willing to pay a premium for straightforward investment strategies that they can easily support in-house. What they value, however, is asset managers that are able to deliver strong and reliable returns through a tailor-made investment solution.

Read more on the survey results here.


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Real Estate Returned 11.82 Percent For Institutional Investors in 2014, Reports Group

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U.S. institutional investors saw their real estate investments return 11.82 percent in 2014, according to the National Council of Real Estate Investment Fiduciaries.

The group also reported that 2014 saw the highest volume of real estate transactions among institutional investors since 2005.

More from the Wall Street Journal:

The council’s NCREIF Property Index showed that real estate owned by institutions had returns of 11.82% in 2014. That’s up slightly from 2013, when returns were 11.22%, but down from 2011 when returns were 14.26%.

The index tracks the performance of over 7,000 properties valued at over $400 billion that are owned by pension funds, asset managers and other institutional investors. The return is a combination of income and the appreciation of the properties. All the returns are unleveraged, assuming the properties are purchased on an all-cash basis.

For 2014, the 11.82% return consisted of a 5.36% income return and a 6.21% appreciation return, NCREIF said.


NCREIF reported that net income at the properties that it tracks increased 6.5% for the year. Occupancy ended the year at 9.9%, the highest level since the first quarter of 2008.

NCREIF also said that sales volume was increasing. In the fourth quarter of 2014, the institutions that the council tracks sold 282 properties and added 271 buildings. That’s the highest transaction volume since 2005.

The 2014 return of 11.82 percent is considered a “sustainable level”, Jeffrey Fisher, a NCREIF researcher, told the Wall Street Journal.


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UK Parliament May Require Pensions to Disclose Contracts With Asset Managers

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UK pension funds could soon be facing higher transparency standards after Parliament members proposed measures recently to force pension funds to disclose contracts with asset managers.

From Investments and Pensions Europe:

Michael German, a Liberal Democrat peer in the UK upper house, tabled an amendment to the current Pension Scheme Bill – legislating for the introduction of defined ambition schemes – to allow members of trust schemes to request details of voting behaviour and the “selection, appointment and monitoring” of asset managers.

Nick Bourne, government whip in the Lords, said the amendments would go much further than currently proposed increases to scheme transparency, but that there was nonetheless merit in further examining all ideas tabled by German.

“However, we consider that greater transparency in relation to costs and charges, as well as about how schemes manage their investments, go hand in hand,” he said.

“As such, they would be better considered together as part of the same well-established transparency work programme, which is already under way and we are committed to consult on later this year.”

He said legislating for German’s proposals before the other changes surrounding fee disclosure came into force in April would risk introducing transparency in a “piecemeal and uncoordinated way”.

“Introducing these requirements through the amendment would remove the opportunity to consult all relevant stakeholders,” he said.

Instead, Bourne said the government would include the proposals in a forthcoming consultation planned by the Department for Work and Pensions, and could then potentially enact any changes as regulation.

ShareAction, which had been working with German on the amendment, welcomed the government’s commitment.

The responsible investment charity’s chief executive Catherine Howarth said: “We warmly welcome the government’s commitment to action that will give UK pension savers long overdue rights to information about what happens to their money.

“We urge pensions minister Steve Webb to move swiftly to set a consultation timetable to make these rights a reality in 2015.”

Read more about the proposed transparency standards here.


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Survey: Pension Funds Disagree on Time Horizon of Long-Term Investing

IPE long term investor

The results of a new survey from IPE magazine reveal that the world’s pension funds agree they are long-term investors. But there is disagreement about what “long-term” actually means.

From Investments & Pensions Europe:

One-quarter of respondents to the Focus Group survey for the November issue of IPE said 3-5 years constituted a ‘long-term’ view, while nearly 78% of respondents considered themselves to be long-term investors.

Only one respondent rejected the label outright.

One UK pension investor pointed to the need for a long-term approach based on long-term liabilities, while an Austrian pension fund argued that it was important to take a generational view – at least when managing the assets of beneficiaries up until 45.

There was less agreement among the 36 European respondents, managing nearly €290bn in combined assets, as to what constitutes ‘long term’ when investing in public market assets.

More than one-third of pension investors said taking a 7-10 year view was long term, whereas nearly 14% believed the better definition was considering investments over the course of a business cycle.

One-quarter of funds said a 3-5 year time horizon was adequate, and 17% argued in favour of a generational view, spanning 15-25 years.

One respondent, a UK local authority scheme, said the long-term perspective manifested itself in asset allocation decisions, pointing to the development of emerging markets over the course of a generation.

The fund added: “Stock selection does tend to take a shorter view, and this is probably dysfunctional.”

A second UK corporate fund questioned whether the idea of long-term investing in public markets was compatible.

“The idea that long-term investment should be public market inherently seems to be at odds with long-term investing,” it said.

“Public markets are driven by short-term liquidity and [mark-to-market] ideology, which is anathema to long-term investing, which is about long-term, sustainable cash flows.”

Despite this, nearly half of respondents did not see a problem in finding external public market asset managers “willing and able” to invest for the long term, and only 9% rejected the notion out of hand.

One-quarter of respondents said asset managers could be found, but only for certain asset classes.

A Swedish investor blamed the regulatory environment, not asset managers.

“[The] main hassle is the short-term view of the regulator and new regulations where you value your liability against a short-term model,” it said.

A second Swedish investor concurred.

“If anything,” it said, “regulation is a problem – in particular, its tendency to change radically every 5-10 years.”

When asked which factors prevented long-term investing, 24% cited the regulatory environment and 21% the maturity of their liabilities.

Only 20% said the asset management industry’s unwillingness or skill was at fault.

One respondent cited the career risk of misguided long-term investments.

For more, see IPE’s analysis here.