The Avon Pension Fund has raised the prospect of dropping some of its active managers after a significant period of underperformance.
None of the scheme’s managers for whom it possesses three-year performance data have reached their outperformance targets, and the majority have underperformed their benchmark returns.
The fund has warned that any serial underperformers will have to be dealt with when it transitions assets to the Brunel Pension Partnership to avoid excess transition costs.
Speaking in response to a scheme member at the pension fund investment panel’s meeting in May, Mercer’s Steve Turner, who advises the scheme, said that Avon’s funding level had fallen.
Mandates covering asset classes including actively-managed equities, diversified growth funds and property have all underperformed three-year targets set by the scheme.
Avon’s assets grew nonetheless to £4.6bn from £4.3bn between March 2017 and March 2018.
Its last actuarial valuation, in March 2016, showed that the scheme was 86 per cent funded.
Certain managers are lacking in conviction
Before making a decision on whether to drop any asset managers, the fund must do its utmost to understand the reasons for underachievement, according to Scott Edmunds, senior investment consultant at Quantum Advisory.
Active equity managers may fail due to their investment style being “out of favour”, he argued. Underperforming individual stocks may also be to blame.
“When you’re armed with that information, you need to understand whether there’s a fundamental flaw in what the manager’s doing,” he said.
Minutes from a May meeting of the fund’s investment panel indicate that increasing volatility “presented a problem for one manager who had opted to unwind equity protection before the full impact of the [fund’s] equity sell-off had materialised”.
While some managers are apparently guilty of pre-empting market falls, Edmunds said that others are costing their clients through a cautious approach to more volatile markets.
“What we have seen more recently is some managers particularly lacking in conviction,” he said. “You need a high conviction manager.”
Continue to full article here