Life fund laggards catch the field up
Investment funds run by some life assurers have shaken off the lethargy of previous years to put themselves among the top performers. Helen Pridham explains how
The primary requirement of any investment fund is good, consistent performance, and this is something Money Observer seeks to highlight in its annual fund awards. This year more and more successful individual funds have been run by the asset management arms of life assurers. Funds from Aegon and Scottish Widows achieved several top or runner-up posi tions.
In the shortlist for the best overall group performance award both Scottish Widows Investment Partnership (SWIP) and Standard Life Investments made it into the final six management groups for excellent all-round performance.
The prominence of some insurance companies’ investment funds in the rankings is a significant turnaround. Traditionally, insurance fund performance has been pedestrian compared with that of pure investment companies such as Artemis, Invesco Perpetual or Jupiter. It is good news for investors generally as it provides more opportunities for spreading investments around, but it is especially welcome for investors in stakeholder pensions, where the investment choices still tend to revolve around insurers’ own in-house funds.
Many insurance companies have been running their own investment funds since the 1970s, when they were set up as underlying investments for unit-linked insurance products. As investors became more interested in the stock market during the 1980s, several insurance groups launched new fund ranges. But then the stock market crash in October 1987 and the recession that followed scared many investors away from shares, and insurance companies turned their attention to with-profits bonds.
Insurance fund performance languished. Tim Cockerill, head of fund research at wealth managers Rowan, says: ‘Performance was uninspiring because managers adopted a low-risk approach and were more concerned about tracking errors than achieving good returns for investors.’
Change of direction
Insurance companies have been forced to change tack following the demise of with-profits funds and the growing popularity of self-invested personal pensions, which has led to a decline in their traditional business.
Companies have adopted different strategies for beefing up their fund offerings. Prudential and Axa bought other fund managers – M&G and Framlington respectively. Resolution, an amalgam of Britannic and Scottish Mutual, has set up a series of semi-independent investment boutiques. Others have reorganised their existing investment operations, setting them apart from the rest of the insurance company and revamping their investment teams.
Among the first to recognise the need for change was Standard Life. In 1998 it brought in Keith Skeoch from James Capel & Co as chief investment officer and David Cumming from Morgan Grenfell as head of UK equities.
They reorganised the investment department into teams and changed the investment process. An in-house quantitative screening tool, the Matrix, is used to filter stocks for further consideration, and company analysts are encouraged to put forward shares for a top 20 ideas list. Jacqueline Kerr, head of mutual fund investments, stresses Standard Life’s team approach: ‘The individual flair of our managers is important, but they don’t work in isolation, which is reassuring if a manager should move on.’
In 2004 Aegon brought in an outsider, Andrew Fleming, as managing director and chief investment officer to turn its asset management arm around. Previously, he had worked for ABN Amro Asset Management and, prior to that, Gartmore, as an investment manager. Fleming says: ‘When I arrived at Aegon I found a demotivated organisation where investment managers had become defensive because they were not rewarded for taking risks or making the right decisions.’
Managers are now encouraged to look longer term instead of chasing short-term performance. Fleming says one of the decisions Aegon got right was to sell banks and other financial stocks at the start of 2007. He has also changed the way managers are paid. ‘For the first time they now have a competitive remuneration structure.’
KEY incentives
Financial incentives for investment managers are an important consideration for investment advisers who analyse funds. They prefer managers who are tied to a company by long-term bonuses and share options. Mark Dampier, director of research at Hargreaves Lansdown, says: ‘The insurance industry has long been a springboard for fund managers. Many of today’s top managers started there but moved on.’
Some advisers fear this is still happening. Last year Standard Life’s Mark Niznik departed to Artemis, and SWIP recently lost most of its European team to BlackRock, although SWIP still has some key European managers in place. 1SWIP was formed in 2000 from the merger of Scottish Widows Investment Management and Hill Samuel Asset Management, after Lloyds TSB took over Scottish Widows.
Graham Wood, SWIP’s chief investment officer for equities, says this was the catalyst for changes to the way SWIP managed equities. ‘We decided to place an increased emphasis on fundamental research and analysis. Previously, we relied mainly on brokers for our research, and our approach to analysis has been fairly superficial. Now we undertake deep research, and managers carry out research and run funds.’
Legal & General’s investment team also combines the roles of fund manager and analyst. Having focused mainly on passive funds until 2003, Legal & General recruited Mark Burgess from Deutsche Asset Management as head of active equity funds. This has led to its funds adopting a much more focused approach. The most obvious example of the new approach is Legal & General Growth, which has 25 equal holdings in FTSE 350 companies.
Many of the UK’s insurers are working hard to boost their returns. The performance of their funds in the UK all companies sector is a bellwether of how well they are doing and, as the table opposite shows, many now feature among the top-quartile performers over three years.
