Are you letting silos dominate your investment portfolio?

The giants of macro-driven rates care little for what is going on downstairs in pharmaceutical equities, and as a result can spend years working in pursuit of a singular and individual goal.

But now the same is being said for managers appointed to different strategies by pension funds.

Hired to perform to a benchmark, managers relentlessly pursue their goal in their own little silo. 

Trustees have been encouraged to avoid becoming distracted by the performance of individual managers and stay focused on the bigger picture.

Running too many different strategies and pooled funds can lead to unappreciated biases, not just though asset correlations but also across themes and economic exposures, said investment experts.

Every time you add a new asset class with a new manager you have a cost to monitor that

Neil Davies, Barnett Waddingham

“Silos develop because individual managers are mandated to run money to market benchmarks rather than to specific fund-related objectives,” said Shamindra Perera, managing director of institutional investment services for Emea at Russell Investments.

“You can get different managers in different pooled funds actually negating each other… what you’re doing is paying active management fees, incurring all the transaction costs of the managers buying and selling. They’re not meant to fit together, they’re meant as standalone products,” he added.

At a strategic level, Perera said he thought it was important that schemes were able to view the overall position of portfolios in real time.

“When our custodian looks at the combined segregated accounts, what you see is a bunch of securities in accounts rather than silos sitting above those,” said Perera.  

“Portfolio managers see the aggregation of one securities portfolio rather than five, six, 15 or 20 manager mandate silos,” he said.

Scheme-level benchmarks

Neil Davies, associate at consultancy Barnett Waddingham, emphasised the importance of a holistic perspective and encouraged schemes to adopt scheme-level benchmarks as their primary focus.

“Individual manager benchmarks are clearly important but are secondary to… whether you have the right amount of money in your scheme and whether you’re delivering, at scheme level, the investment,” said Davies.

Davies said he thought pension schemes that hired managers to gain access to a particular strategy or style, or to diversify across asset classes might unknowingly balance out positions adopted elsewhere within the portfolio.

“Once you layer-upon-layer all those strategies... once you have paid all the fees for doing it and the additional cost of monitoring all those approaches, arguably you just end up with a balanced approach where actually the asset allocation isn’t really changing,” he said.

On top of that are the implicit costs of adding new managers for every asset class and strategy. 

"Every time you add a new asset class with a new manager you have a cost to monitor that – whether that’s a cost in pounds and pence because you're paying someone to help you with it or a time cost for trustees; there is a governance budget for every scheme," Davies said.

Peter Martin, head of manager research at JLT Employee Benefits, said he thought schemes and their advisers were becoming increasingly sophisticated and a more integrated approach had become more embedded.

“It’s a question of how trustees and advisers pull that information together in reporting. Reporting has become more sophisticated and integrated... showing where things are moving over time,” said Martin.