Sunday, 24 September 2017

    Why a DGF is not the best option for the Santander staff pension scheme

    Pension manager Antony Barker explains why his £7.5bn fund doesn’t want, or need, a diversified growth fund

    The Santander scheme falls within the top 50 of the UK’s largest schemes – it is responsible for £7.5bn in assets under management.

    Pensions manager Antony Barker explains why a DGF is not necessarily the most suitable approach for a fund of this size.

    “Clearly, we can buy in managers and funds very, very cheaply,” he says, “and we don’t necessarily need the liquidity that a pooled fund has to have,” given the member demographics and giving over a portion of the fund to one manager on a DGF basis would raise the question of what to do with the rest of the portfolio in order to balance this arrangement.

    “The concept of having multiple assets and tactically allocating between them and providers is fairly resource intensive,” says Barker.

    We do change our strategic allocation fairly frequently

    Santander’s solution has been to build its own liability model. “It’s not so much that we make tactical changes, but we do change our strategic allocation fairly frequently.”

    Where DGFs really come into their own, says Barker, is the defined contribution market. Speaking before the Budget sophisticated variant of the lifestyle approach, which involves holding an equity position for much of the member’s career before de-risking into fixed income and cash.

    In the DC context, he praises DGFs’ ability to “capture exposure to all asset classes at a time when it is appropriate to do so from an asset risk management perspective, rather than a liability risk management perspective”.

    They have a rough idea as to what an average return over time will be but they just want a degree of certainty and capital protection at the end

    This comes back to the idea that DC members don’t necessarily want to make decisions about their own retirement savings. “They have a rough idea as to what an average return over time will be but they just want a degree of certainty and capital protection at the end,” he says.

    His recommendation would be that there should be a multi-asset strategy that is professionally managed “with a degree of capital protection to further reduce volatility and collar returns in some way”.

    If this could be achieved in a DGF, he says it would offer a very attractive alternative to investing in pure equities. Barker does add the caveat that capital protection comes at a cost, even if it makes sense on a risk adjusted basis, which many people still don’t understand.

    Education will be a key part of DGFs’ evolution. There is a need to minimise the confusion around using different terms for the same types of product.

    How do they work out what is the difference between a DGF and a balanced fund, or a mixed asset fund?

    “For largely unsophisticated or uninformed investors, how do they work out what is the difference between a DGF and a balanced fund, or a mixed asset fund?” asks Barker.

    Educating the end consumer will also help to mitigate the risk posed by the possibility of a well-known brand performing badly and giving the industry a bad name, which was a problem raised by a number of survey respondents.

    Derivatives still scare pension fund trustees, which any sort of capital market blow-up will exacerbate, says Barker, “even if you explain that normally derivatives are there to do hedging – where these things blow up is where it’s not hedging, it’s speculation”.

    Barker also thinks increasing diversification will be another key trend.

    “Probably the best DGFs are those that are not single manager offerings,” he says, advocating that there should be external criticism of who is the best provider in each asset class, as well as which asset classes are the most attractive.

    This article is part of a special report on DGFs, sponsored by AXA Investment Managers

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