Barclays Global Investors (BGI) has signed up to a ‘penalty fee’ style contract with the £3bn (E4.8bn) pension fund of UK supermarket chain J S Sainsbury – where the manager will reimburse the pension fund for underperformance on its investment.
BGI will hand back cash to Sainsbury on a relative basis should it fail to perform with a given tracking tolerance, although Geof Pearson, group pensions manager at Sainbury’s declined to give the exact criteria.
Pearson is a vocal advocate of penalty fees and notes that most of the upside in the pension fund/investment manager relationship lies with the latter.
He comments: “I believe when you give a manager the pension fund’s money you give them an opportunity to make money. I also believe in the symmetry of performance, where if there is underperformance there will be a penalty fee. It would at least concentrate minds on what risk was being put in the fund.
“I don’t want BGI to pay me any money, I want them to perform and I wouldn’t have appointed them if I didn’t have every confidence they will. We’re trying to make the relationship realistic and it’s reassuring to me that they have sufficient confidence to give me this concession.”
He adds that the fund is looking to move towards overall penalty fees. “We’ve not achieved that yet, but to me this is a step in the right direction. We have different arrangements with other managers.”
BGI’s performance will be measured over a rolling two year period and Pearson comments: “In essence, if a manager gets the upside it will compensate for any downside over two years.”
BGI currently runs a global multinational index of £100m for Sainsbury’s, which Pearson says may be added to in the future.
Pearson heralds the contract as a ‘new way of thinking’ for pension funds. “Instead of the investment managers giving us their manager agreement, we’ve given them ours and we are trying to impose our will on them a bit more.
“I would have thought it reasonable to agree conditions where if the investment manager does poorly they share the downside. They eat their own cooking, so to speak.” The Sainsbury’s fund has also selected three new investment managers and reshuffled a fourth brief as part of a diversified multi-manager type strategy.
A £75m continental European equity mandate has been awarded to Blackrock. Capital International has landed a pan-European equity brief worth £125m and Goldman Sachs a pan-European small cap tranche of £50m. Mercury Asset Management has also been reappointed to the fund to manage £125m worth of continental European equities.
Pearson explains the philosophy behind the appointments: “We want to spread our assets over a multi-manager structure where we are increasing the globalisation of the fund. These are just steps in that direction.
“The other slant is to look pan-European for the first time. We’re not putting all our eggs in that basket though, because we’re still looking at continental Europe.”
Pearson says he personally believes UK pension funds have too much home bias. “With this multi-manager style we don’t want to stick to any particular asset class, manager or style – we want to diversify where we can.”
With 12 managers and 20 mandates within the fund, he acknowledges the difficulty of keeping track of the structure. “The trustees have said this requires greater delegation and more resources on their part and we are addressing these issues. We don’t want the administration factor to be the tail that wags the dog – the investment principle leads. The fund is devising a new systematic reporting system for manager monitoring.
Frank Russell are advisors to the scheme. Hugh Wheelan

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