PENSION FUND CONSULTANTS & MULTI MANAGERS
Going global or offering tailor-made funds are ways to survive in tough market, writes Jane Roberts
The property multi manager business – managing money and investing it in property indirectly, via other people’s funds – probably seemed much simpler in its infancy 10 years ago. However, like many other real estate innovations, it is a model that has been severely tested since the financial crisis.
“As managers have got bigger it has given them more flexibility to create vehicles around talented managers, exclusively for clients. In niche areas we’ve gone out and created them” Graeme Rutter, Schroders.
Challenges from soured investments and disappointing performance, to a dramatic decline in the number of new funds to invest in, have led to changes in the way the managers who have lasted the course and thrived are choosing to operate.
For the biggest, CBRE Global Multi Manager, the future is global. Although the UK and European pension funds that drove the original business remain extremely important, “capital now flows into multi manager from all over the world”, says its head, Jeremy Plummer. “It has clearly become a global business.”
He says CBRE GMM has seen “good flows into both our global fund of funds and global accounts. It’s been quite noticeable in the past six months and has come from all over.” Schroders, on other hand, has a successful £2.6bn business where 90% of the assets are in the UK. Head of multi manager Graeme Rutter says this is partly “because investor preferences have very much come back to the UK”.
Schroders targets international capital
However, one of Schroders’ next targets will be to focus on international capital. Some of its clients are too small to have their own segregated mandates, and invest in Schroder Indirect Real Estate (SIRE), its £200m, nine-year-old, open-ended fund of funds.
Rutter says that SIRE “has never had a redemption it couldn’t match off. It also invests in property securities, which is part of the reason why its performance has been so good recently.” Both businesses and their competitors, such as Aviva Investors and Aberdeen Asset Management, continue to invest in new funds and to manage funds of funds.
But things are changing around the margins. It is not just that multi managers are making more secondary investments because there are fewer primary opportunities. They are also looking for new ideas and ways to invest and add value, and structuring more bespoke investments for clients.”We have three pitches on separate accounts, specifically focused on club deals and co-investing, one each in Europe, Asia and the US,” says Plummer.
“Investors look enviously at the sovereign wealth funds that go into these joint venture type transactions, because they don’t have enough staff sitting in a different country, or can’t underwrite fast enough, or don’t have the capital for big deals.” CBRE GMM has done more and more of these bespoke deals, usually aggregating capital from multiple clients.
Big managers and consultants take the rap for Triton and RREEF redemptions
Redemption queues at two UK balanced funds, UBS Triton and the former RREEF UK core fund – which has now merged with BlackRock UK Property Fund – have been blamed on multi managers and consultants.
“In some of the bigger multi managers there are concentration issues, in open-ended funds in particular,” says one fund manager. “Larger managers may have a number of clients that will all move in the same way, and that creates liquidity issues in the fund. In UBS Triton a problem was triggered by one multi manager going for the exit.” A consultant can cause the same problem, even if it is advisory rather than discretionary, if it puts a fund on the sell list, he adds.
Jeremy Plummer, head of CBRE GMM, which is still in UBS Triton and has sought to be supportive throughout, says: “The UBS fund has had personnel turnover. They brought in someone who was doing a good job and it was recovering its following, and then he left for BlackRock, which set up a run of redemptions. “I don’t think you can blame it on a concentration block. It was recurring turnover of the team running it.
“UK balanced funds are a central holding for defined benefit capital to go into, and that will continue. The issue is size. DB schemes are in structural decline and to avoid being destabilised by redemptions that will inevitably happen as pension funds de-risk and go into bonds, they need to be big enough, probably a number of billions.”
He sees the problems of two of what were once top 10 UK balanced funds as an argument in support of the UK multi manager model. But a number of consultants have challenged the worth of the specific UK multi manager model, suggesting pension funds might just go into a couple of balanced PUTs instead.
“We’re working on research looking at this, given some are saying ‘why bother?’ which is very flawed,” Plummer says. One of the latest such transactions was taking a $98m stake in a Japanese logistics portfolio, alongside sovereign wealth fund China Investment Corporation and the portfolio’s asset manager, Global Logistics Properties. The ownership of the stake is spread between CBRE GMM’s core-plus Global Alpha Fund and various separate accounts.
Rutter says: “As managers have got bigger it has given them more flexibility to create vehicles around talented managers, exclusively for their clients. In niche areas we’ve gone out and created them, in our Real Income Fund and the Mayfair Capital PUT, which is a good example.”
Mayfair Capital fund manager Rob Palmer picks the stock for the £120m property unit trust, while Schroders is the fund manager and took it offshore: “Its cost-efficient and exclusive,” Rutter says.Best multi managers innovate
Like the consultants to pension funds, multi managers are sometimes welcomed and sometimes not by fund managers. Pete Gladwell, business development manager in Legal & General’s product development team, says: “The best of them can be very innovative, approaching us about working together to take advantage of direct market opportunities in the next 12 months.
“The equity raising for our Industrial Property Investment Fund was driven by multi managers that said: ‘we like this fund’ – as was our leisure fund. Some 75% of the capital in those fixed-life funds comes from multi managers, where they were once clubs of life funds.”
However, multi managers are not always seen as being constructive. “When we are fund raising, multi managers don’t want to be in the same fund with a competitor, because they want to show their investors that they are doing something different,” complains one fund manager. “They are all trying to out-do each other, they are very demanding and some are very vocal.”
“It has been almost all about defined benefit pension fund clients, but as defined contribution pension funds become prevalent, what does that mean for funds and multi managers?” Pete Gladwell, Legal & General
Cameron Fraser, director of property at Henderson Property, says: “It depends on a fund’s performance. If it is good, they let us get on with investing, but if capital is at risk they may be on the phone every day and their investment role becomes a corporate governance role instead.”
Other brickbats flung at multi managers are that the biggest have conflicts of interest and that they pose a concentration risk, particularly in open-ended funds where they may own large stakes in one fund. But they do have procedures to monitor potential conflicts, such as investing in their own funds.
At CBRE GMM, for example, across the whole business, the percentage of in-house funds in portfolios is 9%; Schroders has a cap at 25%. Concentration risk in funds has become a live issue again recently (see panel).
Gladwell wonders about the longer-term picture in the UK for multi managers: “It has been almost all about defined benefit pension fund clients, but as defined contribution pension funds become more and more prevalent, what does that mean for funds and multi managers?
“Will future providers such as NEST [The National Employment Savings Trust, set up by the UK government in October] subcontract to a multi manager or will they turn to a PGGM or an ATP-type model? DC is becoming big business, particularly in 2015 when auto-enrollment arrives – will multi managers have as much capital to play with?”