BZW lands a pensions plum

The ICI billions are a mouth-watering prize for fund managers, writes John Willcock
The news that ICI is shifting the management of roughly half its £4.6bn pension fund from an internal team to an outside firm, BZW Investment Management, illustrates perfectly the competition and the high stakes in this field. BZW Investment Management, a subsidiary of Barclays, will manage about £2bn of the fund in UK investments on an "index-tracking" basis, while Schroder Investment Management and PDFM will each manage a balanced portfolio totalling £2.6bn, including overseas investments.

Fund managers in the City would give their right arm for the central £2bn mandate, one of the biggest in the industry. Managing pension funds is perhaps the most attractive, lucrative and stable kind of business for fund managers. It combines large sums with good fees and steady earnings.

Compare the reliability of earnings from Mercury Asset Management's pension fund operations with majority stakeholder SG Warburg's investment banking earnings. Warburg made just £5.5m in pre-tax profits from investment banking in the six months to 30 September last year while its 75 per cent stake in Mercury contributed profits of £57m.

Although the total of UK pension fund assets is relatively stable at around £480bn, or half of all UK institutional funds, there is a huge opportunity for commercial fund managers to pick up business as companies increasingly farm out management of the funds.

ICI's decision is in line with a trend that has gathered pace over the past 10 years. Companies with big pension funds have concluded that the modern investment world of fast-moving global markets is simply too much for an internal team to deal with adequately.

As a spokesman for ICI put it: "No in-house team can do a broad enough job in an increasingly complex world."

The decision to change investment managers was made by the trustees of the ICI fund assisted by their external advisers and in consultation with the company. Rob Margetts, chairman of the trustees, said yesterday: "The reason for the change was that it was felt that leading external securities managers, with their larger research base, were better-equipped than an in-house team to deal with the complexity and sophistication of today's global markets."

In 1993 just 53 per cent of UK pension funds were managed externally, compared with 59 per cent in 1993, according to a survey by the National Association of Pension Funds.

Another important trend is the move to index-tracking funds, which mirror the performance of the stock markets. This gives a steadier performance, but, most importantly, it costs roughly a third of the actively managed approach. BZW has pioneered index tracking over the past 10 years; roughly half of its funds are managed this way. About £70bn of UK funds are now managed on an index-tracking basis compared with none 10 years ago.

This exerts a competitive pressure on the active-fund managers who select individual stocks, and not just because of price. The active managers, like the so-called "gang of four" which dominate UK pension-fund management, rely heavily on records of theirperformance to sell their services. But all index-tracking funds, by definition, perform the same.

Index-tracking funds have tended to do better than active funds over the past 10 years, during which time roughly a half of all active funds have failed to equal the index.

Pension fund management in London has been dominated by Mercury Asset Management, PDFM, Schroders and Gartmore - the gang of four - who all rely heavily on active-fund management and performance figures. This domination looks likely to continue. In the post-Robert Maxwell era, pension fund trustees are extremely conscious of their responsibilities in choosing the right manager. And no one gets fired for choosing the big four.

Managing pensions money in general requires minuscule amounts of capital in comparison with investment banking operations such as market-making. Having an investment management arm, moreover one with a big pensions presence, has been a key part of successful merchant banking strategies since Big Bang in 1986.

It has certainly featured in BZW's success, and it is significant that Don Brydon, chairman of BZWIM, has recently been made deputy chief executive of the entire BZW investment banking arm, and is widely tipped for the top slot.