UK: Discretionary Fund Management within a SIPP

Last Updated: 30 August 2006

The world of pensions and investment management is an area avoided by many savers whose pension contributions are paid directly into an insurance company’s pooled fund. Good news for the insurance company but not necessarily the best option for investors.

As discussed in the Smith & Williamson article SIPPS - What's All the Fuss About, there are several viable alternatives which grant the investor greater flexibility, visibility and control over the ongoing management of the fund. Appointing a fund manager to invest, with discretion, on your behalf but in line with your express wishes, is the most flexible of all. Discretionary fund management is designed to fit a specific investment strategy by meeting the individual requirements and objectives of investors. This forms the basis of a tailormade portfolio bearing in mind factors such as attitude to risk and time horizon, amongst other things.

A Self Invested Personal Pension (SIPP) is a pension wrapper within which investments are held and managed until the time that the investor needs to draw a pension income, and even then the flexibility it offers can continue unless the investor wants the certainty of an annuity income.

The SIPP was introduced in 1989 by the then Chancellor, Nigel Lawson, who said during his Budget speech, "I propose to make it easier for people with personal pensions to manage their own investments".

The range of permitted investments within the plan is wide and includes quoted securities worldwide, authorised unit trusts, OEICs and suitable commercial property in the UK.

Why discretionary management?

Management of investments can seem daunting and time consuming to some. Discretionary fund management is, therefore, of appeal to sophisticated investors, for those looking at their pension investments for the first time and investors looking for active management of their funds with the potential to add value. By appointing a dedicated fund manager a personal, relationship-driven service geared to the financial objectives of the investor can be established. This, together with a flexible approach and emphasis on getting to ‘know the client’, means that investment options can be directed by these objectives.

Tailored approach – the benefits

Understanding the needs of the investor and building a good relationship is important so that the pension portfolio can be managed efficiently and effectively. An initial meeting with the investor (and/or financial adviser) is essential so that the fund manager can fully understand their requirements and determine a suitable risk profile. As a result of this, an investment strategy can be agreed and work can then begin on the construction of a portfolio specifically designed for the investor. The fund manager can take over the responsibility for the day to day monitoring of the pension investments, responding to fluctuating investment market conditions and any change to the client’s own circumstances. By adopting a diversified approach within the investment portfolio, a degree of flexibility will be maintained which will make it easier to absorb any alterations as required.

Investment process

The investment process has three main elements which have a bearing on future investment performance.

Asset allocation

As discussed in the article earlier in this issue, asset allocation depends on the investor’s risk profile and to this end discretionary fund managers will usually use four models: capital growth, balanced, income and absolute return. These may be guided by benchmarks such as those set by the Association of Private Client Investment Managers and Stockbrokers (APCIMS) but do not have to be. Many managers will adjust these benchmarks based on their own house view of companies, markets and economic outlook in what can best be described as a constant process of review and adjustment. Such a strategy should assist performance in good times and protect capital when conditions are less favourable.

Stock selection

Discretionary fund managers will have sector specialists in the fixed income, UK equity, international equity and collective investment markets and should hold daily investment meetings to discuss market news as well as a weekly meeting in order to focus on specific areas of the market. In addition, they should conduct a large number of company meetings annually.

Fund selection

Many discretionary fund managers will use collective funds to gain access to specialised markets which are either expensive to enter on an individual share basis or require particular investment expertise.

As they do when selecting fixed interest stocks and equity investments, many discretionary managers, including Smith & Williamson, will call upon the expertise of in-house sector analysts, controlled by a selection committee, to produce recommendations for collective investments, including open-ended unit trusts, OEICs, close-ended (investment trusts) and offshore funds.

Discretionary investment management is not ideal for everyone, but is worth serious consideration for investors with £250,000 or more across their personal and pension assets. Should this service be of interest, please contact us to find out more.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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