14/04/2010 Author: Tony Griffiths

Segregated solutions

The decision by major UK pension fund USS to adopt a bespoke approach in its managed account relationship with Man Group may well signal the next step in managed accounts evolution, driven by large institutional investors' desire for control over their investments

Liquidity and control may be overarching themes, but not all managed account options are created equal – a fact that pension funds are more alert to than most. Last week, the Universities Superannuation Scheme (USS), the UK’s second-largest pension fund with around £28bn ($43bn) in AuM, revealed its long-expected move into the managed accounts space, awarding a $1bn advisory mandate to industry stalwart Man Group.

The key here is the word ‘advisory’. The USS-Man venture is not your traditional managed account relationship. Man, owner of the world’s third-largest managed account platform, will provide advisory services, “with regards to operational due diligence, manager take-on and risk management oversight”, the hedge fund manager said, but would not incorporate the assets. USS would have “sole responsibility” for manager selection and portfolio construction – total control of its own $1bn investment.

The growth in managed accounts has been well documented – within these very pages for one – but, as demonstrated by the USS-Man relationship, often, where pension funds are concerned, the traditional, commingled option no longer cuts the mustard.

“More and more investors are looking at managed accounts, but pension plans will less likely be using commingled accounts,” says Soobong Han, EMEA region representative for managed accounts provider Innocap. “They want to do it the way USS is doing it – through private accounts.

“It’s a balance between cost and a turn-key solution,” he adds. “With managed account providers you have the fees, of course, but the competition is so fierce currently that the fees are quite reasonable. If you have a decent amount of money to deploy, why would you go for commingled? Segregated is private, the same in cost and you can effectively own the structure.”

At Innocap, segregated, bespoke options have been the basis for business since 1996, with larger pension funds comprising the majority of the firm’s clients. Most providers now offer segregated options for investors, and those that don’t – most notably market-leader Lyxor – are keen to offer such solutions in the near future. “We are working on segregated accounts for several strategic investors,” Ron Oman, head of external relations for Lyxor’s platform, told HFMWeek earlier in the year.

“The managed account platforms are changing,” says managed account consultant John Godden. “The old-school providers – the Lyxors, the Deutsche Banks, the Mans – have fundamentally altered what they’re doing and the fees are coming down. The USS announcement is the first of many. We know lots of other funds that are in discussions.”

The bespoke option is clearly proving a success for Man. “Until about six months ago, there weren’t many people using our advisory mandate option,” says Martin Keller, Man’s head of institutional clients. “Since then,
an increasing number of institutional clients have expressed an interest – it’s our fastest growing managed
account option.”

Bespoke, private accounts are one step up from the traditional, commingled route, but top of the food-chain sits the self-built platform – the ultimate in control and governance. Here, size is crucial. According to Han, a pension fund needs $1bn ready to allocate to realistically consider such an option. But, as has been proven by the $209bn California Public Employees' Retirement System’s (CalPERS) elongated – and well-publicised – search for a self-owned managed account solution, the process is far from simple.

“There are pension funds that looked into building a platform on their own but it didn’t work out,” says Han. “This is not their core activity and not something that they are mandated to do. If you are trying to hold hedge fund units via an in-house managed account structure then you not only have the investment risk but also the legal and operational risk. Pension funds are not in the business of providing middle- and back-office.”

Private accounts, then, appear a viable compromise. But if, as Godden, Han and Keller predict, the USS-Man
announcement is the start of a spate of similar ventures, why now? “It’s like turning a tanker – it’s taken a while,” says Godden. “It’s taken a while to establish the solution and to execute it, and the new range of managed account platforms are growing to meet this demand.”