Pension fund trustees feel caught in an investment conundrum between low-yielding bonds and the high volatility of equities. Nico Marais, head of the £72 billion ($107 billion) multiasset investments and portfolio solutions (MAPS) division at £300 billion London-based investment management firm Schroders, thinks his firm has an answer: risk-controlled growth, which aims to deliver equitylike returns but with less volatility.
Schroders’s multiasset business has more than tripled since the end of 2009 and now accounts for 24 percent of the firm’s assets under management and 30 percent of its institutional money. The growth is part of a wider trend. Multiasset funds accounted for €125 billion ($138 billion) of the €367 billion of net inflows into European mutual funds last year, according to Lipper, the data provider.
In fact, says Marais, “risk-controlled growth is the biggest part of our business.” The strategy, one of the suite of multiasset strategies offered by Schroders, already enjoys quite a bit of popularity in the U.K., where defined contribution pension funds have embraced it under the term “diversified growth strategies.” Half of the £51.1 billion of institutional money in Schroders’s multiasset strategies is from the firm’s home market. According to Marais, this plan has finally caught on abroad, in particular among Canadian, Japanese and U.S. investors “looking for a different way to achieve growth.” The flagship fund for this strategy, the Schroder Life Diversified Growth Return Fund, has generated an average annual return of 8 percent over the past five years.
The nature of risk-controlled strategies depends greatly on a given economy’s circumstances and market history. Take Japan as an example. Yields on Japanese bonds are extremely low, and the stock market has shown bouts of spectacular volatility over the past few decades. In response to low bond yields and the country’s aging demographics, Japanese pension funds are quickly shifting allocations from bonds into equities with the hope of generating better returns — and fast. But with higher returns comes risk. The job of Marais’s team is to “smooth that path,” as he puts it, and soften the blow from any potential sell-off in equities. This can involve using commodities as a complement to equities and bonds, including those with equitylike risk, such as copper, and those that limit a portfolio’s downside risk, such as gold.
For some pension funds, multiasset strategies other than risk-controlled growth may be a better fit, Marais contends. Many U.K. pension funds have been moving away from equities as part of a derisking process. For such funds, Schroders offers a wealth preservation strategy that tries to limit downside risk by incorporating as many shocks as it can into the fund. This strategy, the fastest-growing of Schroders’s multiasset approaches, encompasses four segments: growth equity, flight-to-quality bonds, inflation commodities and one taking a smart beta behavioral tack. “With those four,” says Marais, “most of the time, whatever happens in the world is covered.” Schroders’s flagship wealth preservation fund, the Schroder Strategic Beta GBP Composite, has returned 11.9 percent over the past year. The firm’s own pension fund is also invested with a view to wealth preservation using multiasset techniques.
Brian Henderson, London-based partner and leader for U.K. defined contribution pensions at human resources consulting firm Mercer, echoes Marais’s enthusiasm about the suitability of multiasset strategies for DC schemes. He notes a particular hot spot in multiasset: the scramble to find investment responses to the U.K. government’s liberalization of pension payouts. Beginning in April, pensioners upon retirement are able to take a quarter of their pensions as a tax-free lump sum, with the opportunity for additional drawdowns, rather than using their entire pension savings to buy an annuity. Investing this money will involve a mixture of multiasset income and wealth preservation strategies, says Henderson. “This is where all the ‘sex and violence’ is at the moment in the industry — investment managers are all trying to develop products in that space.”
