• Decisions about the types of investment management to be used
• Should the scheme be managed in house or be elegated to one or more asset managers?
• If delegated, balanced or specialist management structure?
• Assets invested in existing pooled funds or segregated portfolio?
• Active or passively managed?

• Collective Investment Schemes (CIS)
• invests in existing funds managed by an investment management firm, usually combining several funds for diversification purposes
• Varying investment objectives:  income generation or capital growht
• Types of investment vehicles:
  • Unit trusts
    • hold units
    • bought from and sold to fund manager
    • open-ended
    • unit price depends on net asset value
    • Prices quoted one way or two way
  • ICVC's (formerly OEIC's)
    • hold shares
    • umbrella structure holding sub-funds
    • sub-funds can offer different share classes
    • open-ended
    • share price depends on net asset value
  • Investment Trusts
    • hold shares in fund
    • publicly traded
    • closed-ended fund
    • prices depends on NAV and demand

• Investments of a particular pension scheme are managed by an external manager independently of other funds under its control.
• Managed in accordance with client specific requirements and needs
• trustees are responsible for overall investment policy to be followed by managers

• Fee Structure
  • Pooled:  Flat fee, automatically subtracted from funds
  • Segregated:  Vary according to size of fund, invoiced separately
• Income Distribution
  • Pooled:  income automatically distributed at fixed dates
  • S:  income can be reinvested/distributed - no fixed date
• Performance Reports
  • P:  Standard report
  • S:  bespoke reports
• Investment Flexibility
  • S:  investors can specify how their funds should be managed by identifying benchmark and target asset allocation/returns

Active Management

Passive Management

• Active:
  • Believe in Inefficient markets
  • Managers seek to outperform market index or benchmark by exploiting market irregularities or inefficiencies
  • 'generating alpha'
  • manager skill
• Passive:
  • Markets are efficient/difficult to beat
  • Preferred strategy for those unwilling to take on risks of active management

• Active:
• • Fund managers take an active role by deciding on which assets to buy and sell taking account of factors affecting markets. 
  • Stock selection
    • fundamental - asset's value in the context of underlying factors, e.g. economy and earnings potential
    • technical analysis - past asset price patterns
  • Market timing
    • tactical asset allocation
• Passive:
  • Full index replication
    • exact proportion of every constituent of the index
    • costs are substantial
    • performance should mirror exactly
  • Optimisation
    • computer simulations to construct a portfolio with a limited number of shares chosen to reflect the characteristics of the index
    • Rely on historic share date
    • costs lower
    • Performance will not be precise - tracking error
  • Stratified Sampling
    • random selection of stocks from within each market sector
    • to replicate characteristics of index:  yield and market weight per sector
    • Lower costs + tracking error
  • Synthetic Index Replication
    • Use of derivative

• Advantages:
  • Possibility of excess returns
  • expert manager knowledge
  • defensive measures
  • Large cap bias
  • Large market bias
• Disadvantages:
  • High implementation costs
  • Decision error/underperforming
  • Change of manager could affect performance

• Advantages:
  • Lower cost
  • Less management time
  • Reduced possibility of decision errors/underperforming manager
  • Less reliant on manager
• Disadvantages:
  • No excess returns
  • Net of fees = underperformance
  • No defensive action
  • Tracking error

• Balanced
  • One or more managers allocated (a proportion of) asset's to invest across a range of asset classes
  • Tactical asset allocation decisions are delegated to the investment managers
• Specialist
  • Managers are delegated specific areas of responsibility e.g. different managers for UK equities, global equities, etc
  • Pension funds make strategic decision of how much of their pension scheme assets to be invested in each class.

• MOM (Manager of Managers)
  • appointment of a few select managers
  • given specific mandates to manage the investment in a single fund
  • role of MoM is to select specialist managers, monitor and alter composition of team
• FoF (Fund of Funds)
  • Manager builds portfolio that invests in funds that are run by a number of managers
  • FoF structured as an ICVC or investment trust

• Fund or Manager Selection Expertise
  • FoF:  analytical tools to narrow down the fund universe to a more manageable level
  • FoF: rigorous interviews that reveal more than quantitative analysis
  • FoF:  manager can position himself for changing market dynamics
• Diversification
  • creating blends of best of breed fund managers
  • reducing risk without reducing alpha
• Access
  • even for small schemes

• Higher charges
• results in two layers of charges
• Benefits is economies of scale
  • FOF: able to negotiate very attractive rates

• Costs of IT and financial systems are significant but manageable
• Low priority of response from market participants and less attractive price quotations

• Deposit Administration Contracts
• With Profits Policies
• Managed Funds

• Also known as cash accumlation
• Contributions accumulated in cash pool to which interest and bonuses are added
• May contain min. interest rate
• Proceeds applied to provide pension and other benefits as they become due
• Some contracts retain premiums in pools relating to individual years - able to declare different interest rates or bonus for the different pools
  • when benefits paid out, they're taken from pool relating to oldest year first.
• Advantage:  insurer spared the complicated admin process involved with applying premiums to individual scheme members.

• Seeks to provide a good level of return from a mixed pool of assets, without investor being exposed to volatility associated with direct investment
• Aims to smooth returns, how?
• Traditionally Guaranteed pension = with profits deferred annuity
• Unitised with profits approach
  • emulates features of unitised funds
  • Conts and investment terms could be varied
  • Various methods of allocating values to individual investors but they all increase the value of the with profits fund unit by any guaranteed interest under the contract and bonuses as they are declared
• Fundamental objectives:
  • Contributions accumulated in single investment fund
  • Managed on basis common to all investors
  • Asset mix determined by manager and will vary
  • • proportion invested in gilts to match guarantees
  • Returns distributed by bonuses
• Terminal bonus
• May be costly method of smoothing