Q: What are the key characteristics you look for in a manager beyond performance metrics, particularly for long-term mandates?
A: When assessing a fund manager, alongside performance, we look at four other key areas. The team must demonstrate experience, depth, adequate resources and stability, with a clear purpose and strategy. We also consider corporate culture, leadership, inclusivity, professional development and compensation as essential to long-term stability and performance.
The manager should have a clearly articulated philosophy that guides decision-making, portfolio construction and risk management, with clarity on which market conditions suit the approach. Responsible investing is expected as standard.
The investment process must align with the philosophy and be robust, repeatable and evidence-based. We expect evolution rather than constant change, and focus on the rigour, quality and consistency of research, analysis and idea generation, supported by accountable decision-making.
Portfolio construction should follow a clear path from philosophy to process to delivery of objectives. Consistency over time, appropriate diversification, strong risk management and responsible investment must be evident, along with compliance processes, effective tools and independent governance oversight.
Q: Given your experience advising defined benefit (DB) and defined contribution (DC) pension schemes, how do the investment priorities differ between the two, and how does that influence fund selection today?
The natures of DB and DC schemes are very different, so their investment objectives, time horizon, risk tolerance and investment strategies differ. In DB schemes, it’s usually the sponsoring employer that is responsible for funding the benefits if there is a shortfall and therefore the employer bears the investment risk, whereas in DC schemes, the members bear the investment risk.
Q: What does effective oversight look like in practice? How do you identify early warning signs that a manager may no longer be fit for purpose?
A: Good governance and oversight of fund managers is essential. This involves the monitoring of certain early warning signs as well as regular reviews of funds, performance monitoring of funds and a monthly quantitative screen.
We monitor ten key factors with the aim of identifying potential issues or obtaining early warning of likely risks that may require investigation: business ownership, key persons, controls, share of fund, complexity, capacity, liquidity, philosophy, process and risk.
“We monitor ten key factors with the aim of identifying potential issues or obtaining early warning of likely risks that may require investigation….”
Q: In today’s macro environment, have you seen any evolution in the types of strategies or managers you favour?
A: We are long-term investors and believe that asset allocation decisions have the biggest impact on long-term returns. In a macro environment with the risk of increased volatility and higher correlations between traditional asset classes such as equity and fixed income, we are seeking diversifying strategies in the form of liquid alternatives and private market assets.
Q: How do you balance cost efficiency with quality outcomes when selecting managers, particularly under budget constraints in DC schemes?
A: Cost is an important factor when selecting a DC pension scheme provider, so managing costs and spending the investment budget wisely is vital. Our scale enables us to secure good deals with asset managers for the benefit of our customers.
It is important to use active management and passive management approaches in the right areas. Active management should ideally be deployed where, net of fees and costs, it is expected to add value. Passive management, where costs are lower, should be used where markets are most efficient, and active managers may struggle to outperform.
Q: How important is cultural alignment and communication style when choosing managers for a long-term institutional relationship?
A: Cultural alignment and good communication are important when selecting an asset manager. Ideally, the culture, values and beliefs of a firm will align with ours. We consider our asset managers as partners in the delivery of our propositions, and good communication is essential to deliver good outcomes for our customers.
Q: Scottish Widows’ upcoming open-architecture long term assets fund (LTAF) aims to streamline access to private markets with simplified governance and valuation. How do you approach manager selection and oversight in such a structure?
A: Our LTAF will be structured as an open architecture, multi-manager vehicle. We believe this is vital for the flexibility and control it provides, particularly given the illiquid nature of private assets and the dispersion of returns across some parts of the market, such as private equity.
The role of the authorised corporate director ( FCA-authorised firms responsible for the daily running of an open-ended investment company in the UK) is vital. They appoint the sub-fund managers on our behalf, as well as the other key delegates, such as the depository and transfer agent. They will carry out independent due diligence on the managers before appointing them, in addition to our investment due diligence.
The two managers of the growth and diversified credit LTAF sub-funds, Aberdeen and BNP Paribas, were selected based on their experience in managing multi-strategy private market portfolios of this nature, and the relationships they have cultivated in this part of the market, which are expected to support access to a broad range of investment opportunities.
