Evolution

Arguably, never before have the life companies and the fund management houses been more closely aligned. Nick Groom discusses this new and interesting collaboration, which combines the platform strengths of the pension providers and the fund management capabilities of the investment houses, as DC schemes begin to mature and assets grow to substantial levels.

Some providers have been performing in both areas for sometime now and those with considerable asset management scale will become very powerful in the new DC world of investment platforms. The opportunity to manage scheme assets in one place with a variety of styles, different managers, governance and process controls all in one place (notwithstanding the possibilities for the investment consultants to manage the activity) really is evolution at its best.

Whilst white labelled and blended funds aren’t new concepts, there has never been such an appropriate time for their deployment. The flexibility and advantages of a multi fund blended route can provide pension scheme trustees and their investment advisers with many opportunities, which are particularly relevant in the current uncertain investment climate; control, reduced risk, flexibility and simplified and bespoke member communication are just some of these benefits.

A few headaches have been caused in the past few months by the mixed fortunes of different fund managers, and there is now particular interest, for example, in the makeup of cash and deposit funds as the assumption of short-term ‘safe havens’ disintegrates.

And with investment governance committees considering the makeup and future prospects of their funds, further arguments emerge in favour of passive investment; with no chance of under performance against a benchmark many issues simply disappear.

For those trustees looking to diversify through holding bonds, property or even some alternative investments, unless there is a diversified fund which meets the precise needs of the trustees, that solution can generally only be created through a portfolio of a number of different funds. This leads to member confusion, difficulty in reviewing amalgamated investment performance, rebalancing and complexities in maintaining the right funds for each asset class.

However, there is another solution. By using blended or white labelled funds, trustees can blend together a number of individual funds into one fund (with one price, one charge and one set of performance data) allowing the trustees much greater control as well as helping to manage investment risk through increased diversification. Both active and passive funds can both be included within blends.

Further blending can create a blended fund made up of other blended funds to create the exact investment diversification that trustees and their advisers want. The target fund allocation within the fund can be bespoke for each fund. AXA, for example, can offer a wide choice of monthly, quarterly, half yearly, yearly or tolerance based rebalancing where, if the investment split moves outside pre-determined allowances, a rebalancing to target allocation is automatically triggered.

Communication with scheme members can be simplified and bespoke; there is also no compulsion to advise them (and in the case of contract based arrangements, gain their approval) whenever an underlying fund manager is replaced.

There is also the option of having branded factsheets showing customised benchmarks (be that one particular index or a weighted combination of indices) and personalised fund objectives, all contributing to a funds solution which is exactly tailored to the individual requirements of that scheme. Blended funds can be named by their trustees to reflect this fund objective and in a language that is appropriate for the scheme membership – no doubt improving clarity and understanding.

Where investment consultants are retained to add their delegated and implemented consulting techniques, and dynamically manage the schemes’ assets, this ability to react and trigger the change on the funds platform – whether it is rebalancing, a change of asset allocation or new manager can be critical for the performance of the fund in these uncertain times.