08/08/2012

Fauchier Feels Bite of Pension Withdrawals

Fund-of-funds manager Fauchier Partners has struggled to retain institutional clients in the U.K. amid an ongoing shift in investor sentiment away from multi-manager products.

The latest to redeem: £2.2 billion ($3.4 billion) pension Leicestershire County Council, which last week decided to terminate a five-year relationship with Fauchier. A few weeks earlier, London Borough of Lewisham’s pension plan canceled a £21 million mandate with Fauchier’s Jubilee Absolute Return Fund — the vehicle that has borne the brunt of the redemptions.

Both pensions intend to redeploy the capital by making direct investments in hedge funds. Leicestershire County Council is looking to plow up to £80 million into a managed-futures vehicle, while London Borough of Lewisham is targeting a so-called diversified-growth fund.

Two years of steady outflows — including $400 million in 2011 and $600 million so far this year — have dropped Fauchier’s assets under management to $6.3 billion, from nearly $8 billion at yearend 2010. The London unit of BNP Paribas has managed to offset some of the recent exits with new business. Earlier this year, for example, Cheshire County Council’s pension finished funding a commitment to Jubilee Absolute Return Fund. That vehicle has produced a 3.5% average annual return since its 2004 inception.

Outflows are a continuing concern for many funds of funds in both Europe and America. Pensions and other institutional investors that once were too timid to invest directly in hedge funds now feel they have enough experience to go the direct route. The change in strategy has contributed to six straight quarters of net outflows for funds of funds.

“In this low interest-rate environment, investors aren’t getting the bang for their buck,” said a partner at another large fund-of-funds operation. “Their advisors feel the need to make changes, and anything that’s generating a point or two more alpha becomes a target.”

One beneficiary of this trend are managers of diversified-growth funds, which have become a popular choice among U.K. institutions. Those vehicles seek to deliver equity-like returns with significantly less volatility by investing in “growth assets” such as commodities and high-yield bonds. A number of pension advisors have been steering their clients toward diversified-growth funds — including Hymans Robertson, which advises both Leicestershire County Council and London Borough of Lewisham.

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