Despite the widespread acceptance of the multi-manager structure and the manifest efficiency of hiring a range of specialist managers to run a pension fund, some trustees, foundation boards and investment committees remain uncertain over the most appropriate structure to achieve this.
The term ‘multi-manager’ is used to cover a broad range of structures, but there is an important difference between the arrangements established with asset managers directly by the trustee, supervisory or foundation board, often on the advice of a consultant, and arrangements where a third party is appointed to hire, monitor and fire the underlying managers.
In this latter arrangement – originally referred to as a manager of managers – the board makes a positive decision to hand over responsibility for the appointment of the asset managers and their replacement if this is necessary. So, while the board retains ultimate responsibility for the performance of the pension fund, it no longer has any direct contact with or control over the underlying managers. And while it may be of academic interest to view the performance of the underlying asset managers, it is the performance of the multi-manager provider as a whole with which the board must be concerned.
Patrick Disney, managing director of SEI UK, explained the options that now face trustees. “The traditional method of manager selection is for the trustees to hold a beauty parade for each manager selection. The method we tend to refer to as the Stamford model (devised by the consultant Stamford Associates) offers trustees a recommended list of managers. Here the consultant only goes to the trustees to have the list ratified.
“The third method, used by SEI, is for the multi-manager to undertake the entire process of hiring and monitoring the underlying managers. SEI is a fund manager and as such we produce performance results in the usual way and have a standard fund manager agreement with the trustees.”

The regulatory position
Whatever the jurisdiction, multi-manager providers have always argued that the trustee or foundation board is unlikely to be expert in investment matters, although clearly the level of knowledge will vary considerably. Nor does the board have the time necessary to undertake detailed examination of investment trends in general and investment managers in particular. This is not the primary function of the board.
This argument leads to the logical, though not unchallenged conclusion that for the board to delegate the manager selection and monitoring to a specialist third party, far from representing an abrogation of its duties and responsibilities, it is in fact delegation in the most prudent sense of the word.
A useful analogy here is with global
custody. Consider the case of a multinational corporation with pension funds in several countries, and the relationship between the trustee or foundation board and a carefully selected global custodian. Once the board has put its trust in the global provider it is neither necessary nor practical to have a separate agreement with each of the sub-custodians. The selection of the sub-custodians is delegated to the expert global provider, which has the expertise to vet sub-custodians in each market, just as the multi-manager provider has the expertise to select the best asset managers from around the globe.
The manifest attractions of multi-manager may be gaining rapid acceptance but like any comparatively new approach in the conservative world of pensions, it takes time for the legal and regulatory regimes to catch up.

Regulatory approach in the UK
In the largest European market – the UK – trustees are required to draw up a statement of investment principles (SIP) with the aid of a professional adviser. It is essential that this adviser is appointed directly by the trustees and not by the sponsoring employer. The SIP sets out the investment aims, the balance between different kinds of suitable investments, and the need for diversification between these investments. In the case of defined contribution (DC) schemes, the SIP must also include details of the investment choice for members.
Under the Pension Act (1995) all trusteeship duties carry specific criminal and civil sanctions. Each of these can either be legally delegated to a professional or the trustees are permitted to take out appropriate insurance to cover their liability. The only exception to this flexibility is the asset management, which must remain the trustees’ direct responsibility.
Nevertheless, trustees have a statutory power to delegate any decisions about investment management to a fund manager authorised by the appropriate regulators to advise or actually manage the assets. Provided the selection of the managers is prudent, the trustees are not responsible for the performance of the fund.
In its assessment of how well trustees have exercised their duties the Occupational Pensions Regulatory Authority (OPRA), the supervisory authority established by the act, will not be concerned with the investment returns in isolation. Instead, it will focus on the process used by the trustees in reaching the conclusion that a multi-manager structure was appropriate for the fund.

Best structure for current investment
climate?
So far, the multi-manager approach seems to be proving its mettle as pension funds struggle to maintain positive returns in volatile world markets. Sohail Jaffer, managing director of Premium Select, says, “We believe that the multi manager, best-in-class approach is particularly relevant in the current investment climate. With bear markets around the world making investors nervous, we believe the benefits of global diversification through multi-manager portfolios can capture the potential for robust long-term performance while simultaneously managing the risks of short term volatility.”
Like most multi-managers, Premium Select is able to offer access to the world’s leading asset managers, some of which do not offer direct services in Europe. This is achieved through a choice of portfolios that offer access to different assets classes, managers and styles.
Compare this with the traditional structure for small to medium-sized pension funds in the UK, for example. At best the scheme might have been able to appoint a single balanced manager but for smaller funds the choice has typically been limited to the pooled funds operated by the major insurance companies. These have not been particularly successful in recent years, nor does the trustee board have any influence over the content of the pool, which may be shared with several hundred other pension schemes.
Jon Bailie, managing director of institutional investment services at Frank Russell Company, says, “The regulatory environment in the UK has made it possible to separate setting strategy and implementing it by allowing trustees, under defined
circumstances, to delegate their liability for day to day investment decisions to investment experts. The trustees remain liable only for setting the strategy and the selection and monitoring of the person implementing the strategy. Trustees can sleep better at night and can save considerably on cost if they select an outsourced solution.”

Holland, Italy and France
The same logic applies in all the main European markets. Derrick Dunne, director of Attica Asset Management, says, “Whether it’s a trustee, supervisory or foundation board, we would advocate that the delegation to full time professionals in manager selection and manager structures increases the probability of achieving the respective board’s objectives. The growth in the use of specialist manager structures places considerable pressure on boards in terms of time and resource. For this reason we see interest in the manager of managers approach right across the major European markets.
“From a legal perspective, there is little to prevent a board in any European country from delegating (the hiring and firing). The board still remains ultimately responsible for the management of the assets and has control over the retention, or otherwise, of the manager of managers provider.”
Bailie says that Frank Russell has seen a high level of interest in the multi-manager approach from funds across Europe and has been successful in picking up new mandates in Holland, Italy and France. “Certainly we are not aware of any regulatory restrictions in the Netherlands which impedes pension funds from investing in multi manager funds. Indeed, we’ve recently signed up four pension funds in the Netherlands to Russell’s multi-manager funds.”
In other European countries, for example Spain, pension funds have been investing in collective funds for some time. “Moving into multi-manager funds appears to be the next step forward,” Bailie argues. “From our point of view there are no restrictions to hinder that move in these countries.’

Luxembourg
Premium Select is one of the few multi-manager fund providers registered and regulated in Luxembourg. Jaffer says, “We were attracted to Luxembourg due to its prominence as a major European investment fund centre, the opportunity for product innovation, the quality service infrastructure and the market driven approach of the regulators. Our view of Europe as a whole is that multi-manager funds and funds of funds are increasingly proving attractive to mid-sized pension funds, insurance companies, corporates, family wealth offices, and financial intermediaries including banks, broker networks and investment advisers.”
According to Jaffer, it is possible under Luxembourg law for the board of directors of a Luxembourg investment company (SICAV or SICAF) or for the board of directors of the management company of a Luxembourg collective investment fund (FCP) to delegate part of their daily management tasks – for example the management of the assets of the fund or sub fund.
“The third party to which such delegation is made (hiring, monitoring and replacing of the managers) will have to be acceptable to the Luxembourg regulator – the Commission de Surveillance du Secteur Financier (CSSF) – and will, in principle, have to be an investment manager,” Jaffer explains.
The board of directors is responsible for this delegation and will also have to monitor the investment manager. In a multi-manager structure the investment manager will be authorised to delegate part of its task to other managers in accordance with the investment management agreement. This agreement is subject to the approval of the CSSF as are the agreements between the multi-manager and the asset managers.

Wide appeal to all fund sizes
The growing acceptance of multi managers at a regulatory level has been outstripped by the practical uses to which the structure is being put. Originally, the multi-manager structure was targeted at the small to medium-sized pension funds for which a segregated multi-manager approach was inappropriate, partly due to the lack of critical mass for the individual funds and partly due to the fees.
This view has changed and many of the appointments today are for specialist asset classes. Mike Clark, head of client service at Frank Russell, says, “Although multi-manager funds are sometimes thought of as cost-effective solutions for small to medium-sized pension schemes, we find that trustees of large schemes are increasingly using multi manager funds for specific asset classes where they do not wish to spend time on selecting and monitoring all their managers.
“Here, the trustees set overall strategy, and may still want to appoint managers for a few significant asset classes – UK equity, for example. However, they want a packaged solution for other asset classes like international equity.” In Russell’s experience, once the board has tried and tested the multi-manager structure in the following years it moves more and more of its funds into this structure.
“This allows them to increase their focus on strategic issues,” Clark says. “A decision maker at one of our clients told us that outsourcing the manager monitoring responsibility had helped him to clarify his strategic role. He is pleased that the trustees now focus much more of their time on the investment objectives and strategy of the scheme.”
One of the most interesting developments in the multi-manager field is the growing use of these structures by multinationals. Clark says, “Whilst national regulations make it clear that domestic fiduciaries are responsible for local pension plans, multinationals are seeking ways to co-ordinate pension provision globally.”
Russell has several clients who use the company’s multi-manager funds in more than one country. “They know they are buying the same manager research with consistent implementation across several plans, yet each group of fiduciaries remains in control of their strategy. This approach also offers multinationals the opportunity for global co-ordination of risk from a corporate perspective,” he explains.
In conclusion there seems little doubt about the appropriate nature of the multi-manager structure for pension schemes of all sizes – from the small fund to the major multi-billion dollar scheme, from national schemes to the multinational company that needs to achieve global strategy for the asset management of the pension funds of its diverse operations.
In practice many of the concerns that were first raised over the structure appear to have proved unfounded. Provided the costs do not outweigh the advantages, regulators across Europe appear satisfied that the careful appointment of a multi-manager provider is a clear discharge of the trustee or foundation board’s duties.
Debbie Harrison is a freelance journalist

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