Running the Pension Assets Better

Many funds have had a torrid 2008. Talking to pension Trustees we are finding that many have lost substantial money by remaining fully invested in equities, property and other claims on real assets in addition to holding some bonds which have fared a bit better. Many funds have also lost additional money through employing active managers to run their equity and other asset portfolios. In the extreme volatility of 2008 most active managers have lost against the relevant index, in some cases losing substantial sums on top of the decline in the underlying asset class.

Worse still, many Trustees do not have access to asset allocation advice, and are usually told by their professional advisers not to meddle with the asset allocation even in situations where that means losing substantial sums of money. This naturally leaves Trustees feeling worried about their responsibilities and the poor performance that results from all the expensive advice around the table. So often the investment managers claim they need their fees to manage the individual shares and bonds actively, but do not take responsibility for the overall allocation.

At Evercore Pan-Asset we have developed an approach to investing which can tackle these losses and give Trustees greater security and control over the strategy of their fund. We start from the proposition that the main determinant of how well a fund performs is the proportion it chooses to invest in equities, bonds, cash and other assets. Indeed, the independent academic studies show that at least 100% of the positive performance of the average fund comes from this general decision about which assets to invest in, as most share selection subtracts value.

We offer Trustees continuous advice on asset allocation, and can work on a discretionary or an advisory basis. In 2008 we favoured very high weightings in cash and short bonds, as we were very pessimistic about the outlook for equities and property. Trustees cannot avoid making these important decisions about asset allocation.

We also favour implementing the asset allocation decision by indexing the investments. We find Exchange Traded Funds give us the right balance of transparency, liquidity and low tracking error which help us to improve fund performance. A typical ETF for UK or US equities can have a tracking error as low as just 6 basis points after all costs and expenses and some ETFs even have a positive tracking error and beat the index by a small margin. This compares with 100 to 200 basis points of tracking error after expenses for the typical active managed fund. Positive tracking errors cannot be relied upon, but even earning all but 0.06% of the equity index return is much better than losing 1 -2% of the return from average active management.

We would welcome the opportunity to talk to you about your pension scheme. At least we could probably save you money on the active management fees your fund is paying, and offer you the asset allocation advice you need for a lower total fee than you are currently paying. This is a way to raise performance that does not require superior judgement about which market will do best. We would also hope to offer advice which could help preserve fund assets in bad times, and offer some sensible growth in better times without entailing undue risk.