The Spence Johnson Blog

By Magnus Spence, 31 May 2016Market Intelligence | Investment Products

Strong growth of pooled unconstrained fixed income

As investors look for yield and interest rate protection, unconstrained fixed income (UFI) is a category that has seen strong inflows in particular from institutional investors.

UFI sits in between traditional benchmark funds and fixed income hedge funds. There is a clear distinction between UFI and traditional benchmarked bond funds: the former can dynamically invest in the full credit spectrum and derivatives without being limited to a benchmark. However, the more complex UFI, such as absolute return funds, can be quite similar to hedge funds. As my colleague Maxim Waller – the leader of our research in this area - puts it: “The main difference we find is that absolute return funds are cheaper, more transparent and less complex than hedge funds”.

We have broken down the UFI space into three categories:  traditional Multi-asset Credit (MAC), a second category that we call “Alternative MAC”, and absolute return credit.  Traditional MAC uses a market or peer benchmark, and alternative MAC uses a cash benchmark or no benchmark. Whereas MAC focuses on credit spread opportunities and derives value from sector rotation, absolute return credit use shorting and derivatives in the credit market to generate returns regardless of market conditions.

Spence Johnson’s Institutional Money in Motion (iMiM) project has revealed that UFI assets have seen a growth of over 55% between end of 2011 and Q2 2015. This reflects a compounded annual growth rate of 13.6%.

At the time of the crisis, UFI pooled fund assets in Europe amounted to €20bn.  Now there are €171bn in UFI pooled assets across our sample of 165 UFI funds.   When you then add in our estimated €111bn in current UFI segregated mandates in Europe, the current total UFI market in Europe is €282bn.

Recently, the growth in UFI has been driven by alternative MAC. These funds have seen very strong growth, both in terms of assets and flow. Alternative MAC assets grew by 54% from €35bn to €54bn between 2013 Q3 and 2015 Q3. Traditional MAC and absolute return credit on the other hand, has remained almost flat during the past two years.

It appears that flows during 2015 have been coming from institutional investors. This indicates that although the majority of UFI pooled assets are retail, recently this balance seems to be shifting. As a percentage of institutional assets end of 2014, alternative MAC funds have seen by far the most flow.

We predict strong growth of pooled unconstrained fixed income; from a current €171bn to €300bn in 2020, which implies a CAGR of 11.8%. The last word I feel should go to Maxim again.  He says he expects “this growth to be fuelled in particular by perceived interest rate risk by investors, as rates hikes are likely to occur in the US, UK and eventually Europe in the coming years”.

By Magnus Spence, 11 June 2015Market Intelligence | Investment Products

The Birth of iMiM

At the launch event for Institutional Money in Motion at the Crypt of St Etheldreda’s Church in Holborn. 5th June 2015, Magnus Spence welcomed guests with the story of iMiM’s birth.  And he talked about a tawdry saint, a near treacherous Shakespeare, a great statesman not unlike Tywin Lannister, and a devastated London. 

My name is Magnus Spence I am the managing director of Spence Johnson.  I want to welcome you to this event to mark the launch of Institutional Money in Motion or iMiM   as we call our new baby. 

In a minute I am going to tell you something about how Institutional Money in Motion was conceived and born. In some senses, in this religious place, this evening is a christening ceremony, I suppose.   

But first let me tell you something about this very special 700 year old church, and its links with a tawdry saint, with a near treacherous Shakespeare, with a great statesman not unlike Tywin Lannister, and with a devastated London. This history tells us a little about the birth of iMiM   as well as reminding us how far we have come as a city and as a culture. 

St Etheldreda’s Church nowadays sits squeezed rather uncomfortably I feel into to a residential street.   


But it was once part of a 58 acre complex called Ely Palace, the London home of the Bishops of Ely in medieval times.   


You can see here an impression of it how huge it was in the 16th century, with St Etheldreda’s chapel clearly visible on the left.   

Behind the palace and the Fleet River lies old St Paul’s, and then far off eastwards in the distance, 30 minutes walk away, is the other side of London and the Tower. 

Later I want to tell you about how iMiM has moved across this same landscape in modern London. 

The patron saint of Ely was Etheldreda, also known as Audrey, who was an Anglo-Saxon princess who lived in the 7th century.  So she gave her name to this church and her statue is upstairs.   


She was revered in her East Anglian home region among other things for setting free all the bondsmen on her lands and she led a life of exemplary austerity, for which she was made a saint. 

For nearly 8 centuries after her death lace momentos that were said to ward off illness were sold in her name. They were called ‘tawdry’ lace – shortened from ‘St Audrey Lace’.  This practise was well known - Shakespeare mentions them in a Winter’s Tale for example.   

After the reformation buying tawdry lace was decreed to be a backward and unfashionable Catholic practice and the word ‘tawdry’ took on a new derogatory meaning which remains to this day. 

This is a Catholic church, in fact it is the oldest one in England. Upstairs lining the walls and in the windows are memorials to English Catholic martyrs.   

Let me introduce you to two of the martyrs.  They were both made into Saints in 1970.  They provide some interesting links to Shakespeare who may himself have been a secret Catholic, and thus technically a traitor. 

This man is Swithun Wells.   


His house in Grays Inn Fields very near here was raided in 1591 by the arch priest hunter, Richard Topcliffe, and Swithun was found guilty of harbouring a priest.  He was hanged outside his own front door. Swithun and Shakespeare knew each other well and shared a patron.  

This is Anne Line.   


She was hung at Tyburn in 1601.  Her crime: allowing a mass to take place in her home.  Afterwards her body was secretly taken away and buried by Catholic nobles.   Shakespeare is said to have written a poem for this highly illegal ceremony.   

Another link with this place and Shakespeare is that John of Gaunt, who was a hugely influential figure in the 14th century, lived here in Ely House for 17 years.  He is a character in Shakespeare’s Richard II, and has these immortal lines as his deathbed speech which in the play was delivered here at Ely House. If you are old enough you may remember John Gielgud’s TV portrayal of this role 40 years ago, along with Derek Jacobi as Richard II. 


The lines seem to paint an idyllic picture of the condition of England.  But Shakespeare had subtle ways of expressing his dissatisfaction with the religious intolerance of his times. John of Gaunt later in the same speech goes on to lament the state of the country.  

It was clear to Shakespeare’s contemporaries that the play was a direct critique of Elizabethan England and the play, or parts of it, were banned. 

Let me tell you more about John of Gaunt who lived two centuries before Shakespeare.    

He was Duke of Lancaster, son of one king and father of another, and the richest nobleman in England owning no fewer than thirty castles, as well as tenancy of this place.  As the founding father of the house of Lancaster he was in effect the Tywin Lannister of his era, and they do look alike.  Tywin I admit is more likely to be modelled on a later Lancastrian: Warwick the Kingmaker.  


After John of Gaunt’s death he was apparently laid out in this very crypt awaiting burial in St Paul’s Cathedral across the Fleet River from here, where an elaborate tomb was made for him and his wife.   

Why can’t we see this tomb at St Paul’s today?  Because old St Pauls along with John of Gaunt’s tomb was burned down three centuries later in the Great Fire of London of 1666.   


You can see how the fire started in Pudding Lane shown here, and fanned by the wind,  swept westwards across London.  But the wind changed just before it reached where we are now - marked in green dot - and St Etheldreda’s was saved.   

After the fire, you could have walked for 30 minutes from here down Holborn and then Cheapside to the Tower and seen nothing but charred ruins.  It destroyed virtually the whole city within the old walls, which are marked on this map, as are the seven gates.  


Forgive me the indulgence of all this history.  Many of us at Spence Johnson are historians, it is a very good training for what we do.  So you will not be surprised to know that Institutional Money in Motion has a history.   

Two Spence Johnson directors as well as team members were active in European institutional research in the 1990s and 2000s, me with Sector Analysis, and Philip Robinson and Tabitha Rendall with Watson Wyatt’s Global Asset Study.   

In 1998  my firm Sector Analysis set up European Investor Focus, a 900 interview per year research initiative operating from Berlin, and this research has continued every year since, although I no longer have any involvement with it.  It is now called Fund Buyer Focus.   

Here is an example institutional output from EIF 2003 when I was then running, which estimated the value of mandates across Europe shown here in a heat map.  Green is for the highest numbers and red the lowest. 


Nigel will be bringing some of these numbers up to date later tonight.   

Institutional Money in Motion has deep roots.  But what you will see revealed from today was in reality born at the red dot marked 1 here in 2011, coincidentally like the Great Fire of London not far from Pudding Lane.   


By 2011 Nigel Birch had already set in place ground breaking work in measuring and describing the Fiduciary Management market in Europe.  Nils Johnson and I asked him to predict the next big research need among institutional asset managers.   

Nigel went away to have 25 conversations, and came back with his conclusion to us at the London Capital Club.  His discovery was that someone needed to collect European institutional mandate and fund data from asset managers to create measures of asset flows, intermediary influence and the changes in institutional investors’ behaviour.   

I can remember that 2011 conversation vividly.  We were very excited by the thought that we could once again bring to bear our long-established European research skills.   

But realism soon kicked in.  We were only a team of four at that stage, it would have been mad to think we could do this task justice.  So we put this project on the back burner. 

We never lost the dream however.   

In the following 2 years we moved to our current offices shown as 2 here on a street called London Wall – and you can clearly see here why our street gets its name - by Moorgate.  By 2013 we had doubled in size. 

Then one day in 2013 while sitting in a restaurant at point 3 on our map, a client told us of the urgent need for someone to collect - yes you have guessed it - institutional mandate and fund data from asset managers.  They called it measuring ‘institutional money in motion’.  

This time we were big enough to bear the responsibility of this huge task.  We now even had a name for this work, and we jumped into action.   

Other clients followed quickly behind in recommending us to take up this challenge. 

This evening we sit at point 4 on our map in this historic place.  In coming days you will see the results of the hard work done by Nigel,  Will and many others within what is now a 15 strong Spence Johnson team, to bring this badly needed initiative to life.   

Like the great fire of London our European initiative has in its genesis swept across London, but not quite on the same route, and not this time I hope leaving devastation behind.  

History, you could say, is on our side.  

The particular client who first inspired us to take the leap is here tonight, but so also are some of the 40 other clients who have supported Institutional Money in Motion along the way.   We owe you all a great debt for your faith in our ability, skills and resources.  

Thank you for this support and for coming, and I very much hope you enjoy the rest of what we have for you this evening.

By Magnus Spence, 26 February 2015Market Intelligence

European DB and DC Pensions Opportunities across the map

For years now, we along with everyone else in European pensions have ducked a big issue: how can we describe the pensions systems in Europe using a common language?   

We need this in order to answer questions like this one, which is frequently put to us: how big is Defined Contribution pensions in Europe?

We have finally developed an answer to this very question, and it is: €1trn.  But it is more complicated than this: we divide it into ‘pure DC’ and ‘semi DC’.  Let me explain.

The terminology that works in the US and UK (‘Defined Contribution’ (DC) and ‘Defined Benefit’ or ‘Final salary’ (DB)) does not work well in continental Europe. There is a huge variety of pension systems with many different structures, actors and guarantees. A large proportion of European pensions falls somewhere in a spectrum between pure DC and DB. 

So we have developed a new categorisation system to allow us to put the funded pension elements in Europe into four segments:

  • Pure DB  - Similar to the DB pensions in the US/UK
  • Semi DB  - Not pure DB, but shows DB characteristics
  • Semi DC - Not pure DC but  shows DC characteristics
  • Pure DC - Similar to the DC pensions in the US/UK

The pure segments are easier to be sure about, it’s the ones the middle - semi DB or semi DC – that are more subject to debate. When we made our decisions about where to place a certain pensions system in our recent European DB and DC Pensions Annual Report , we were not driven in our choice of classifications by what these elements happen to be called, but by how they behave.  This has led to one or two surprising classifications.  For example you might be tempted to conclude from its name that the Dutch collective DC market is a DC-like element in the pensions system.  We disagree.   The characteristics of this particular element are more similar to a traditional DB final salary pension than a 401k style DC one. We classify it as semi DB.

We have classified a pension element according to six behaviours:

  • Sponsor involvement in paying pension in retirement
  • Sponsor share of investment risk
  • Sponsor share of pension contribution
  • Degree of sponsor involvement in investment decision making
  • Degree of guarantee
  • Degree to which members assets are collected in single fund vs. multiple individual funds

We have applied this set of filters to the 28 elements of the 8 European pension markets we have analysed in this report.  These come from the eight European countries which make the largest contribution to funded pensions.

The aggregate assets covered by these 28 pensions elements total €5.2trn.  The DB assets we have looked at total €4.2trn, and the DC style assets another €1trn.   Pure DB represents the largest part of the European pensions market, with €2.5trn, and semi DB represents another €1.7trn. Pure DC accounts for €0.8trn and semi DC holds another €0.2trn.

So now, at long last we have that all important answer.

By Magnus Spence, 15 May 2013Market Intelligence | DB Pensions

The DGF market conundrum

The Diversified Growth Fund (DGF) market is a riddle within a conundrum. It has no definition, and its users and promoters can have quite different ideas on its purpose.   Here are three comments to illustrate my point.

  • “What DGFs give us is the confidence of knowing that for at least part of our portfolio there is someone who is alert to the markets, and capable of making appropriate changes quickly.  So DGFs are a way of buying flexibility, and countering our post 2008 fears about rigidity.” A pension Fund Trustee
  • “DGFs are a way of delivering real returns in a low volatile manner.  At the same time they are also a way of providing wide diversity in a cost effective way”.  An asset management Marketer
  • “What are DGFs, I am not sure I understand what you mean?  You have just described something which I would call a hedge fund.  And then you described something else which I would call an actively managed balanced fund.  What exactly do you mean by ‘DGF’?” An asset management product developer

How are these views reconciled?  How can it be that Trustee users of a product can see attributes in it that are so different to the way they are envisaged by those who market them.  And – even more remarkably – how can a fund category whose UK institutional element consists of around 20 funds and £62bn in AuM,  be the cause of so much perplexity in the industry as a whole, to the extent that some deny its very existence.

Here is how we reconcile it in our recent study on this topic:  Diversified growth is a brand not a fund type.   The DGF category has grown to encompass a broad range of funds which defy strict categorisation. 

What we mean by this is that buyers want flexibility, they want to address their fears, they want a counter to turbulence, and they want it provided at a price that does not make their eyes water.  There is no need for the products that meet this need to be the same, because it is not the product they are buying, but the benefit.  This makes DGFs very unusual in the product driven world of asset management.  It is clients who have driven this one. 

In future blogs on this topic we will try to answer the question: Should every asset manager have one? 

By Magnus Spence, 29 April 2013Market Intelligence | DC Pensions

Small schemes are not important, right? Wrong!

There is a deep reluctance in government or regulatory circles to give us measures on the whole UK DC market.  For example in an otherwise very important and useful DWP survey (“Pension landscape and charging: Quantitative and qualitative research with employers and pension providers”) there is no analysis of schemes with less than 6 members.

Now you may say this is picking hairs.  Very small schemes are not important, right?  Wrong!  Very small schemes are a huge proportion of the DC market.  In a recent study we carried out with 12 Pensions Providers (summarised in “Defined Contribution Provider Group Data Summary January 2013”) we showed that among schemes serviced on a bundled basis,  80% of schemes have less than 25 memberships. 

So, small schemes are numerous.  But even more importantly, they have a disproportionately very high value of assets per member.  We have toyed with numbers here, and are not yet 100% sure of our ground, but we think it may be possible that the assets per member – which we estimate average around £30,000 per member across all of DC – are as high as £500,000 or more per member among very small schemes.  By very small schemes we mean those with less than 6 members, exactly that group completely ignored by the DWP’s own survey.

We are debating whether to go with cock-up or conspiracy as our conclusions on this one.  Conspiracy would suggest that there may be a policy-driven reason for not wanting to bring to our attention this small group of very wealthy pension savers who have benefitted so much from tax relief in the past 20 years.   Hmmm.  Concluding that this oversight is a cock-up would suggest that those responsible for monitoring and regulating our pensions market have little understanding of its dynamics and are being blind-sided by assumptions like “small schemes are not important”.  Neither is a very healthy conclusion.