Digital Transformation » Systems & Software » New survey highlights UK fund success

According to recent figures from the WM Company, which specialises in the measurement of the performance and the costs of pension funds, the UK does pretty well on such, admittedly scant, comparators as are available.

The WM Company’s research, probably the first piece of serious comparative research to be made available, was restricted to funds with assets in excess of #500m and included responses from 58 clients, representing 70 individual pension plans and aggregate assets of over #132bn. To improve the accuracy of the results, the survey “topped and tailed” the sample, by excluding the three funds with the highest running costs and the three funds with the lowest running costs, thus concentrating on a more tightly clustered sample of 52 respondents.

It also distinguished between externally managed and internally managed funds. An important distinction as some of the UK’s largest pension funds, around 40 in all, are managed in-house. The importance of this core of in-house managed funds in any overall survey of the market, is that they represent very good value for money.

Somewhat surprisingly – at least to any outsider – the results seem to show those institutions which specialise in investment management and which handle the bulk of the UK’s pension fund business do not manage to deliver the same value for money, as far as running costs are concerned, as their relatively tiny competitors inside those enterprises who are still prepared to manage their own pension funds. Economies of scale, it seems, are not working quite as one might have expected. Consequently, the in-house teams play an important role in holding down the overall investment running costs of UK plcs. For the purposes of the WM Company’s survey, funds that were primarily internally managed but part outsourced were treated as fully internally managed funds.

The survey produced a number of results with some fairly mixed patterns.

In general terms it revealed fund size to have an important influence on total running costs, with costs tending to be proportionately lower the larger the fund. However, management method was the most important factor.

What was particularly clear was that UK in-house fund costs averaged less than half that for externally managed funds at eight basis points as against 18 basis points. For both categories by far the largest cost component was securities management, including custody – accounting for around 70% of the costs in both cases.

Key to the general argument that UK FDs are getting a good deal, whether they go in-house or externally for their pension fund management, is the fact that both categories showed up well against the average cost, measured in basis points, for US and Canadian funds where the average was 50 basis points and 40 basis points, respectively. With UK pension funds having earned a real return of some 9%, or 900 basis points, through 1996, they would appear to be getting a very good deal in absolute terms.

The US and Canadian figures in the WM Company’s sample come from a study of returns made by the firm’s US clients on the one hand, and from the publication, Benefits Canada, on the other. They, too, show UK funds doing well in international terms.

The peculiarities of the US market make interesting fodder for the active/passive debate. Those who sing the virtues of passive, index tracking funds, base their case on the self evident difficulties faced by active managers trying to outdo the index year on year. One thing that does emerge is that active management, when properly deployed, can surmount the odd inherent misjudgement.

In many ways, although UK funds did well in 1996, this was a triumph that survived what could otherwise have turned out to be a catastrophic misreading of the US market. Many UK fund managers started bailing out of the US market in 1995, convinced that it had grown over-ripe.

By and large, active UK fund managers who reduced their holdings appear to have stayed out and found other horses to back – notably UK plc – and these other horses have run well. They have also not spoilt their chances by throwing funds at the Japanese market, which has been having a dire time of it.

While a fund that passively tracked the US index would not have missed out on its strong performance – unlike certain actively managed funds – it would not have benefitted as strongly from certain other up-side events which active managers did buy into with the funds they “mistakenly” took out of the US.

Does any of this make it easier for an employer to make a decision between the relative merits of active versus passive funds? Probably not. Although it highlights the concept of risk and the consequences of actively shifting between funds, in the end the choice of investment vehicle comes down to one’s own personal comfort level.

The only certain thing is that pension fund money has to continue to work hard and to generate strong real growth if future generations of pensioners are going to escape relative – or even actual – impoverishment in their old age.