As pension deficits continue to linger, and investment solutions become more complex to try to tackle these, schemes are raising questions over the ‘optimum’ number of managers, and indeed strategies and asset classes, they should be invested in.
We have seen a number of cases of smaller schemes implementing their investment strategy using only one or two managers capable of running a number of traditional asset classes (i.e. equities and bonds). While this approach is cost effective, there is a significant concentration risk attached. If those one or two managers were to disappoint, the scheme would have no fall back option.
However, in recognition of this issue, many are changing their approach and are now choosing to diversify by using a greater number of managers across a wider spectrum of asset classes: that way reducing concentration risk and maximising the opportunities for returns.
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Whilst there are clearly strong arguments for diversification, where schemes can benefit from manager concentration is when trustees set investment targets based on scheme specifics. For instance, schemes are increasingly likely to employ single managers for specific mandates, i.e. a passive manager to provide low-cost access to an otherwise highly expensive asset class.
It is key to remember that no single option is right for all. As long as schemes are confident in the ability of their investments to deliver on their objectives, schemes should not be concerned about the issue of manager concentration. What is of upmost importance is that trustees take the time to get to grips with the overall approaches available to them, before thoroughly assessing the managers (whether that be 2 managers or many managers!) which are best placed to help them reach their investment goals.