Experts are debating whether the segregated mandate model is coming under pressure as one its most prominent users, St James’s Place, makes a raft of fund manager changes.
In January, SJP replaced Axa Investment Management as the manager of its £3bn Balanced Managed Unit Trust after 11 years running the mandate, replacing it with US-based GMO and Jennison Associates as co-managers. Then in May the firm announced a trio of other changes to lead managers across some of its funds.
Analysis by consultancy firm Next Wealth of manager switches in segregated funds run for wealth managers reveals that changes are rare, occurring on average every six to 14 years. The lengthy courtship and due diligence process is a key reason, and agreements typically include a minimum lock-in period.
A tender for a segregated mandate can be triggered when an investment committee decides to review a manager, for when there has been a change at the mandate holder.
Next Wealth managing director Heather Hopkins says SJP’s replacement of Axa was likely to have been triggered by the retirement of mandate manager Richard Peirson and a review of the new manager’s style.
She says: “If there is a change in a lead manager on a segregated mandate then the investment committee would have an obligation to look at the relationship and whether it is the right manager.”
She adds: “A lot of wealth managers are looking at diversifying their larger segregated mandates from a single manager or firm to multiple managers, as they are getting to such a size they want to make sure aren’t giving too much money to a single manager. So replacing Axa with two managers makes sense, given the size the fund has reached.”
Winning a mandate
While many wealth managers show a bias for scale players when selecting an asset manager, this is less important for SJP.
Figures from Next Wealth show that only 38 per cent of SJP’s assets are managed by firms among the top 50 in retail funds under management.
SJP’s approach means smaller fund managers that perform well – such as Burgundy Perspective, EdgePoint and Paradice Investment Management – have managed to win mandates.
What makes SJP different to other wealth managers is it uses a range of consultants – mostly relying on Stamford Associates and Reddington for manager monitoring and selection.
These consultants recommend the list of firms to receive the tender for a mandate with SJP.
Hopkins says that for SJP to consider asset managers it is important for them to have a close relationship with these consultants, as well as offering something unique.
She says: “SJP is not necessarily looking for the largest mandates. It is often looking for something different.
“Wealth managers have a different set of obligations to institutional firms, so understanding relationships with its customers, how that adviser’s fund works, the risks they are facing and their big concerns can be a real asset to fund manager.”
She adds: “In terms of buying power, the mandates are really attractive to asset managers as they can get really good flows from them. However, because SJP has buying power it uses this to its advantage to push firms on price.”
The mandates are really attractive to asset managers, but SJP is able to use its buying power to push firms on price
Hopkins does not think the recent changes at SJP mean that firms will be shifting away from segregated management, which she predicts to double in the next two years.
She says: “Wealth managers are struggling by offering advice alone, but SJP has convinced a lot of firms to take the segregated mandate plunge.”
It makes sense for SJP to outsource its fund management portfolios as this saves a huge amount on fixed costs. For the privilege, SJP charges annual management fees several times larger than the amount paid for services to external fund managers.
Gbi2 managing director Graham Bentley thinks it is unlikely that a fund manager would sacrifice the relationship with SJP because of this.
He says: “Managers do not care what SJP charges. The more important question for them is can SJP run separate mandates and do so effectively? In other words, how is that mandate going to be run differently to the fund you are already running?”
Bentley points out that the underlying holdings in the SJP mandate run by Neil Woodford, for example, are significantly different to the Woodford Equity Income fund.
He adds: “When a segregated mandate is given it is not necessarily a clone of an existing fund. You would struggle to justify the difference in fees to clients if the same fund was cheaper elsewhere.
“Woodford’s fund is quite heavily skewed towards the building sector. It is almost as if SJP has said ‘we want the mandate to run this way, but we don’t want to be involved in your pet projects for starter companies’.”
Woodford under pressure?
It has been a tough time for Woodford of late, with investors pulling money following disappointing fund performance. Morningstar has downgraded his signature £6bn equity income fund, while Charles Stanley Direct has ditched it from its list of preferred holdings.
In March, the fund was also moved out of the Investment Association’s Equity Income sector after failing to beat the FTSE All Share index over the past three years.
So is SJP likely to dump Woodford in the same way it did Axa?
Bentley believes this is unlikely, because of the strength of Woodford’s track record. He says: “SJP will suffer in silence because they anticipate a good fund manager goes through periods like this. The same happened with Anthony Bolton at Fidelity who had a similar profile to Woodford.
“It happens to the best of them. Being able to predict whether SJP dumps him or not is a moot point – it depends on its long-term view – but anything is possible.”