• Editor

Looking for an umbrella fund? Watch out for leaks!

Increasingly trustees are choosing to pass on the burden of managing their own standalone pension funds by enrolling their members in umbrella funds. With the many advantages of why to look towards an umbrella solution, there remains the question of how tailored can my investment portfolio be, relative to the cost?

In terms of advice, independent financial advisors who focus on employee benefits can assist employers with their decisions, should be made aware of the following:

Excessive investment choice

With such a wide array of investment portfolios available to employees and IFAs on umbrella platforms, how do they make the choice best suited to their members? How, and on what basis, are they able to differentiate between investment houses, other than relying on past performance, which is not always an indicator of future performance?

Often, less is more. Do members really need access to more than two or three funds, possibly with life staging built in? In the famous “jam experiment”, researchers Sheena Iyengar and Mark Lepper offered shoppers different selections of jam. On day one, six kinds of jam were on offer. The next day, there were 24 kinds to choose from. While the second test brought more customers into the shop, the first test resulted in more sales. The smaller selection resulted in 12% of customers buying jam, while the larger selection resulted in only 2% of customers buying jam. This is known as the paradox of choice. Even though we think offering choice will be appealing to buyers the reality is that buyers find too much choice debilitating. The same is true for too much investment choice.

Best of breed managers

Often using a balanced fund offered by an investment manager who is strong in one asset class, say equities, but less adept at investing in fixed income, results in diluted returns. Having a quality equity manager paired with a specialist manager on the fixed income side can be to members’ advantage. However, manual intervention to rebalance the asset allocation and the cost implications as you add on specialist managers, can become overwhelming for IFAs when attempting to blend managers.

Blending and style

IFAs may try to blend what they believe is the best of the available portfolios for a client. All too often, it happens to be brand names that either have the same or a similar investment style, which results in duplication of certain stocks or styles, ultimately detracting from performance. Understanding the style of a manager and how they contribute to the overall portfolio, is key to understanding how they will perform in a phase of the market cycle and will complement the overall makeup of the portfolio. Asset allocation is key to performance and blending in terms of trying to get the correct asset class mix is complex.

Finding alpha in unusual places

As the world continues to change, so too should your investments. A good investment house should always try to provide growth through diversification, whether through new or additional asset classes or broader geographic exposure or finding untapped or new markets for clients. China, for example, has seen exponential growth and will possibly see more in the next few years, yet we are limited in terms of selection under many umbrella structures. In a well-designed asset allocation portfolio, exposure to a market such as this can have an enormous impact over a period.

Active vs. passive

Even as the either/or debate rages on, the reality is that sometimes neither is the most appropriate solution on its own. Often passive managers are used to reduce costs, but you may have to give up on alpha. Active on the other hand can be expensive and in uncertain markets, underperformance of the benchmark does not sit well with clients. Having a strategy that incorporates both active and passive in the portfolio make-up will help reduce costs while allowing you to build on specialist managers that can go beyond just the index to attain alpha.

If you are thinking of moving to an umbrella solution, consider an alternative investment portfolio that allows for a complimentary mix of specialist managers with different styles, active and passive options as well as access to different geographical markets.


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