Identifying potential dangers before they escalate: A fund manager's perspective
Scottish Widows, a leading pension provider, has announced the upcoming launch of an open-architecture long term assets fund (LTAF). The new fund aims to simplify access to private markets for investors, offering streamlined governance and valuation.
Cost is a significant consideration when selecting a defined contribution (DC) pension scheme provider. Scottish Widows emphasises the importance of managing costs and spending the investment budget wisely. The company's scale enables it to secure good deals with asset managers, benefiting its customers.
The LTAF will be structured as an open architecture, multi-manager vehicle for flexibility and control in the illiquid nature of private assets. 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 their relationships in the market.
When choosing a manager for long-term investment in an open architecture long-term asset fund, factors such as the manager's experience, growth-oriented investment strategy, flexible use of various instruments like equities, bonds, and structured products tailored to current market assessments, and their ability to adhere to an appropriate risk-return profile are crucial. Manager monitoring typically involves ongoing evaluation of investment decisions and alignment with fund objectives to ensure attractive capital growth with manageable risk.
The assessment of a fund manager includes performance, experience, depth, adequate resources, stability, a clear purpose and strategy, corporate culture, leadership, inclusivity, professional development, compensation, and responsible investing. The investment process should align with the philosophy and be robust, repeatable, and evidence-based.
In selecting managers for a long-term institutional relationship, cultural alignment and good communication are essential for delivering good outcomes for customers. In DC schemes, the members bear the investment risk, whereas in defined benefit (DB) schemes, it's usually the sponsoring employer that is responsible for funding the benefits if there is a shortfall.
In a macro environment with increased volatility and higher correlations between traditional asset classes, Scottish Widows is seeking diversifying strategies in the form of liquid alternatives and private market assets. The role of the authorised corporate director includes conducting independent due diligence on the managers before appointing them, in addition to the investment due diligence by Scottish Widows. The authorised corporate director plays a vital role in the LTAF, appointing sub-fund managers and other key delegates.
Good governance and oversight of fund managers involve the monitoring of ten key factors: business ownership, key persons, controls, share of fund, complexity, capacity, liquidity, philosophy, process, and risk. Early warning signs that a manager may no longer be fit for purpose can be identified through regular reviews of funds, performance monitoring of funds, and a monthly quantitative screen.
Scottish Widows uses active management in areas where it is expected to add value, and passive management where markets are most efficient and active managers may struggle to outperform. The investment process should follow a clear path from philosophy to process to delivery of objectives, with consistency over time, appropriate diversification, strong risk management, responsible investment, compliance processes, effective tools, and independent governance oversight.
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