Tolkien’s Hobbits would love consensus investing. The strategy can be regarded as the comfort blanket approach to pension asset management. It not only keeps you within the herd of pension funds, it makes sure you are plumb in the middle.
The consensus approach, which has flourished in the UK over the past decade, is essentially a way of indexing balanced portfolios. Back in 1989, Alan Cardwell, who was then with the Allied Domecq pension fund, recalls approaching Barclays Global Investors, saying: “I like the idea of indexing portfolios, but what about asset allocation, can you give an indexing solution to this?” The fund group came back with the potential solution of using a “consensus allocation” based on the average of UK pension fund universes, but tracking the market indices to take out the stock specific risk for the components of the portfolio.
It was an idea whose time definitely had come and resulted in this distinctive approach to indexing, which has attracted some £20bn- plus in assets to the handful of managers offering the product.
Cardwell, who has since joined BGI, says the appeal of consensus, which attracts small and large funds, is for funds who want to avoid surprises. “They don’t want volatility of returns, to be off a benchmark by 2 or 3%, whether above or below. By dampening volatility, they want to reduce uncertainty.”
As Rick Lacaille at Gartmore puts it: “Consensus provides predictable performance in the medium term, measured against the peer group at low cost. For many clients it addresses exactly what they are looking for in a balanced portfolio.” The interest from pension funds is across the size range, he confirms.
Gartmore and BGI initially offered the strategy to segregated portfolios from around 1989 with the pooled funds coming on stream during the 1990s. BGI has £12.7bn currently in the strategy, with just £1bn in its pooled funds, while for Gartmore of the £1.7bn it manages over £900m is in the fund. “In the segregated accounts the accounts can run to several hundreds of millions, but in the fund, the majority are in the £15 to £20m range.”
Legal & General’s consensus fund dwarfs the others, holding £6.7bn after just five years. In the view of Christopher Robinson at L&G: “There are major advantages in using pooling vehicles for indexed assets, such as cost and tracking.” A CAPS trustees universe benchmark is used for this fund, so where clients want others, L&G uses its different index pooled funds and adjust the asset allocation individually to the chosen consensus and its largest client has £900m in its own designated fund. “Because of the local authority rule that you cannot have more than 25% in pooled funds, we run some segregated portfolios,” he says.
He points out that when clients leave to set up their own benchmarked potfolios, “we can easily unbundle our structure and provide them their individual benchmarks, but using our different index tracking funds”.
At BGI, Cardwell says: “We mainly use CAPS and WM quarterly data, but we encourage the use of CAPS as we get better information from them.”
Dresdner RCM Global Investors in London aims to provide some added spice in its £180m Enhanced Consensus funds as director William Babtie explains: “We try to give that extra alpha over straightforward indexation. We are on top of the consensus funds performance in the market, by adding typically 40 to 50 basis points to returns.”
He says the group is seeing a steady stream of interest in its approach from consultants and reckons there will be increasing scope to use the consensus strategies with other active fund strategies. “By mixing the sweeties out of the box, we can provide for smaller clients what the consultants are putting together for larger clients.” He calls this the “lifestyle approach for pension funds”.
BGI is developing its “advanced active” in its Consensus Plus fund designed to add 70–100bps, according to Cardwell. “This fund is quite new and has attracted £20m.”
Until recently consensus was a British-only product – that is, until the Irish decided to give it a whirl. Irish Life took up the consensus approach in 1996.
The Dublin group’s Gerry Keenan says: “We initially targeted the defined contribution market. We felt that for the multinationals setting up in Ireland, an indexed product was suitable.”
Irish Life took the average of the asset allocation of the pooled pension funds in the Irish market. “The demand in the marketplace was for a balanced product,” he says. He reckons that the company captured 75% of the new DC market business with the fund. “It was an incredible hit rate.”
Then, when it had a two-year track record, Irish Life decided to tackle the defined benefit market. “We obtained interest from some of the biggest funds and now the level of DB assets is about 70% of all our consensus assets amounting to Ir£1.4bn,” says Keenan. As a proportion of total Irish pension assets, the Irish Life consensus assets alone must now be higher than the total UK consensus assets are of all pensions assets.
Keenan expresses some surprise that other asset managers in Ireland are going into the market, saying: “I think there is a lack of understanding of the core issues in running indexation correctly.”
But Pramit Ghose of Friends First in Dublin, which launched a consensus fund some months ago, explains: “Currently in competition for the new accounts on the DC side, the consensus is the choice of clients. We feel having a good active fund management plus the consensus, we will be able to pick up a lot of business.” But in order not to take his active team’s eye off the ball, the group teamed up with State Street Global Advisors to develop the new fund.
Now Canada Life and Norwich Union have joined the consensus fray and the Bank of Ireland, the biggest Irish manager of all, is to jump in with a fund later this year.
At consultants Mercer in Dublin, Deborah Reidy observes: “We are now having beauty parades for consensus managers on their own.” But that is not as strange as it seems, since there are differences in approach and results. She says: “For example, Irish Life managed to outperform the average by 2.1% in 1998. This is a huge deviation, which the manager feels is a success. But in my opinion it is not, as it is meant to have a tracking error of 0.5% in Irish and overseas equities.”
Even in the UK, managers admit there can be deviations in tracking from time to time, but claim that over the longer term the tracking of the benchmark indices is pretty spot on.
Whether consensus conversion can spread from the western isles to the continental mainland is a question exercising BGI. “It would be a logical step,” says Cardwell. So far there does not seem to be much interest in the Netherlands or Switzerland, where balanced mandates prevail in parts of the pensions market. However, one Belgian manager is believed to be seriously looking at the area.