The Spence Johnson Blog

By Jonathan Libre, 14 September 2016Market Intelligence | DB Pensions

Implications for asset managers remains largely uncertain as winning LGPS mandates will become more competitive and more difficult.

In spite of the Brexit vote and the replacement of George Osbourne as Chancellor, the Government seems eager to maintain the momentum behind the pooling of LGPS assets. By July 2016, the provisional pools were required to submit their proposed timescales for fully implementing their plans by 2018.

The policy was designed to merge the 89 LGPS funds across England and Wales into at least 6 so-called ‘British Wealth Funds’, each with minimum assets of £25bn. The individual funds were encouraged to pool on the basis of either geographical proximity or like-minded investment behaviour, and following the consultation 8 pools emerged. On the basis of 2015 asset values, only 5 of these have met the threshold requirements; these were the London CIV, the Northern Powerhouse, the Midlands pool, SE Access, and the Border to Coast pool. The Wales pool, the ALM Partnership and the Brunel (CAP) fell short, with total assets of £13bn, £12bn and £23bn respectively.

A key objective of the reform was to reduce costs, through economies of scales and a greater use of internal asset management teams. Our analysis of each of the individual scheme annual reports has allowed us to show that economies of scale are indeed evident within the LGPS sector. On average, schemes with less than £2bn in assets faced total costs of 48bps, of which 38bps constituted investment costs. In contrast, the average investment cost for schemes with over £5bn in assets was 20bps, of an average total cost of 25bps.

Although larger schemes are likely to be able to negotiate lower fees with managers, they are also more likely to have the internal investment expertise, which is itself associated with lower investment costs. The average investment cost of a scheme which outsources over 75% of its assets to external asset managers was 40bps, while the schemes which outsourced less than 50% of their assets paid just 7bps on average.

By looking at the pooling proposals of each of the schemes, as well as the current investment behaviour of the individual schemes, we have also been able to gain an indication of what the future behaviour of the pools might look like.

The proposed pools differ dramatically in terms of the proportion of their total assets that is outsourced to external managers. The pool which is most likely to use internal asset management is the Northern Powerhouse, which will comprise the Greater Manchester Pension Fund, the West Yorkshire Pension Fund and the Merseyside Pension Fund. Overall, 44% of the assets of their schemes are allocated to in-house managers. The large number of sub-scale pension funds that will make up the London CIV, SE Access and Wales pools are far less likely to have internal capabilities. Only 4%, 2% and 3% of the assets of these schemes are invested through internal asset management teams respectively. Overall, 22% of LGPS assets are managed by in-house investment teams.

There are also significant differences in asset allocation. The Lancashire Pension Fund, London Pension Fund Authority (LFPA) and Berkshire Pension Fund, which will merge together into the ALM Partnership, have a far lower allocation to equities than most other LGPS funds. While on average 57% of LGPS assets are invested in equity, equity makes up 42% of the assets of the funds making up the ALM Partnership. Perhaps with a greater focus on liabilities management, these funds also have a greater allocation to LDI and fixed income than average. In contrast, the Welsh schemes have the highest exposure to equities: 66% of the assets of Welsh LGPS schemes are invested in equity.

While the implications for asset managers remains largely uncertain, winning LGPS mandates will become more competitive and more difficult. While there will be winners – for instance, with BlackRock winning a £2.8bn passive mandate for the Welsh pool – the use of internal management, the increased cost focus and the smaller number of potential clients means that many more will lose out. Arguably it is the smallest schemes which will face the most significant changes, and therefore the managers who have a small number of (often very healthy) relationships with these clients are most likely to be at risk.

By Will Mayne, 18 September 2014Market Intelligence | DB Pensions

Solutions for the DB end game

Continued stock market growth may help to disguise this, but in the near future we predict in our 2014 UK DB Market Intelligence report that the structural decline of DB will reveal itself in falling asset numbers. Taking into account all the many factors which will impact this number, and making our own assumptions on each, we estimate that in 2023 the private sector UK DB market will be £1,052bn, a fall of 6% from £1,119bn today. So when we say decline, we do not mean a severe fall.  And we also forecast that these DB schemes in 2023 will still contain over 50% more assets than will Workplace DC at that time, so it would be wrong to say that the aged aunt of DB is being quickly supplanted by its younger cousin.

However DB is changing, and changing rapidly. From as early as 2009 Spence Johnson have been a keen observer of the birth and growth of fiduciary management in the UK. Now, at nearly £60bn, the market is starting to move from a minority solution to a dominant feature of the UK DB landscape. We expect this to continue and predict that FM solutions will control over £200bn by 2023.

Our faith in the future of FM is buoyed by three factors. The first is the closing of DB schemes and a growing interest amongst sponsors to delegate day to day management of the DB scheme to a fiduciary manager focused on end game planning. The second is the support of UK consultants; either through acting as providers of solutions directly, or building selection and monitoring businesses to complement the growing role of FM. The final factor is client satisfaction. We have recently conducted a client satisfaction survey of 32 fiduciary management clients. Our findings support the findings of other studies which indicate almost universal satisfaction of DB schemes with FM.


By Philip Robinson, 13 June 2013Client Research | DB Pensions

Net Promoter Scores back in vogue?

Meeting a major UK asset manager the other day the question was posed - how can we measure sales effectiveness?  This is the same question I have been asked repeatedly of late. The conversations then focus on Net Promoter Scores. 

The concept of Net Promoter Scores was pioneered in 2003 by Fred Reichheld. In a Harvard Business Review article claiming that this score was ‘the one number you need to grow’ a metric was born that is widely followed in client research. 

Net Promoter Scores are calculated on a scale out of 10 with 9 and 10 being considered promoters.  Scores 7 and 8 are fence sitters and scores 0 to 6 are detractors.  The Net Promoter Score is the % of promoters minus the % of detractors. 

The range of Net Promoter Scores is 25% to 61% in over 50 client audits conducted on behalf of 9 asset managers over the past 5 years.  This survey sample comprises over 2,500 pension decision makers responsible for assets in excess of £250 billion globally.

This is a good result and one that needs to be better known.  At a time when the respected Edelman Trustbarometer reports that the financial services industry is the least trusted sector globally the asset management industry, by contrast, is generally trusted by institutional clients. 

Asset managers need to earn the right to be proactive.  If an asset manager is underperforming on a mandate then there is much less of a right to sell new strategies to that client.  Nevertheless if the investment performance and client relationship are strong then there is a greater willingness to respond positively to an approach.  When we have posed this question directly with decision makers the range of positive responses is from 15 to 35%.  So, if you are doing well more than a 1/3rd of clients will listen seriously to you.  That is a good result and one that must take seriously. 

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 Philip Robinson, 29 April 2013Client Research | DB Pensions

Client retention in times of stress

Keeping institutional clients obviously makes financial sense. Research conducted in 2008 suggested that good client management can keep clients for more than 12 months despite investment underperformance. If that is the case then on a £100 million global equity mandate this equates to about £500,000 on a median fee (source: LCP).

At a recent Financial Services Forum attended by over 40 decision makers and chaired by Spence Johnson the focus was client retention. 5 clear themes emerged from the debate.

Firstly, good client management gives you longer time with clients. And that means precious fee income.

Secondly, it is all about people. Take people out of the equation in asset management at your peril! Most respected manager researchers state that the actual team makes up about 40% of a decision. I have conducted over 50 client audits in 5 years with over 2,500 pension decision makers (c £250bn globally) and the message is always the same – responsiveness to queries by a consistent team known to the end client is the most important criterion.

Thirdly, a few tips on what not to do. Client tiering is generally not good practice. I have war stories where a client realised he was a Bronze client and he told many others. Result – client loss! Industrialised reporting rather than bespoke doesn’t work either. And be careful on outsourcing administration as clients state that managers doing this get lower client satisfaction ratings.

Fourthly, take care on trying to ascertain the true costs of good client management. Portfolio managers will have to face the clients in times of underperformance and this is increasingly expensive!

Fifthly, listen to clients. Over 75% of asset managers undertake client audits either internally or externally with an independent. The trick is to act on the findings and ensure higher ratings in future.