Saul diversifies with three specialist EM mandates

Each of the three chosen managers has contrasting styles, which Saul's investment committee felt was necessary to achieve a diverse income stream.

"They will be the first explicit emerging market funds we have invested in but we do have some exposure to emerging markets through other equity funds," said Penny Green, chief executive of Saul.

The £1.5bn scheme had previously invested in a Nomura Asia ex-Japan fund but Green said the new funds enabled Saul to access growth in Latin America, Africa, the Middle East as well as Asia.

"We are aware that emerging markets of today were frontier markets in the past," said Green.

Mercer's annual survey into European pension assets showed 19.7 per cent of schemes now have a specific allocation to emerging market equities, up from 17.2 per cent in 2010.

These typically account for 5-10 per cent of the pension scheme's total portfolio.

Schemes that make high allocations to certain asset classes can benefit from the diversity of employing different managers with complementary styles.

This can reduce volatility in returns and help schemes ensure they are able to pay their members' retirement income.

Why Saul chose the funds

Green said the scheme's trustees had wanted to widen its exposure to emerging markets by looking at new geographic areas as well as different strategies.

If your allocation is hundreds of millions of pounds it is good to diversify managers

Richard Tyszkiewicz, Bfinance

Saul previously had some emerging markets exposure through its global equities funds and the Nomura fund. But the new mandates allowed access to more specific areas.

The investment committee chose a traditional equities fund run by Martin Currie, a small-cap specialist fund run by Somerset and a multi-asset Calamos fund with a more macro outlook.

The Martin Currie fund has a mandate to outperform the MSCI Emerging Markets Index by 3 percentage points a year over rolling three and five-year periods. Green described it as a typical "bottom-up, stock picking" fund.

The Calamos fund also tracks the MSCI index but it invests in a much wider pool of assets and companies.

It is a multi-asset fund so it will invest in both equities and bonds. It also invests in developed market companies that derive returns from emerging market economies.

"Calamos comes at this from a completely different perspective," said Green. "The fund invests in all types of companies that will benefit from a growing emerging markets sector, not just emerging market companies."

Somerset has been given a benchmark of beating the Russell Bespoke Emerging Markets SMID Cap and Frontier Index.

Green said: "We chose that fund because we have seen good returns over time from smaller-cap stocks."

Governance concerns

Schemes with higher allocations to emerging markets tend to invest in a number of different funds to take advantage of the benefits of different strategies.

[We] already have a complicated risk structure in place

Penny Green, Saul

Richard Tyszkiewicz, senior director at Bfinance, said the number of managers chosen was typically down to the size of the allocation.

"There is a level below which it makes no sense to go with more than one manager," he said. "If your allocation is small you are not going to get a good price.

"But if your allocation is hundreds of millions of pounds it is good to diversify managers that have a different style to get an all-weather portfolio."

One potential risk of investing in a number of different funds is whether you have a governance framework in place to allow you to monitor managers' performance.

But Green said this was not a major issue for Saul as the scheme already had an investment committee and a head of investments in place.

"It is not as if we do not already have a complicated risk structure in place as it is," she added.