KPMG’s Patrick McCoy, Eversheds’ Jeremy Goodwin, Buck Global Investment Advisors’ Brian McCauley, Russell Investments’ Shamindra Perera, MN’s Christy Jesudasan and BNP Paribas’ Anton Wouters discuss whether schemes should conduct a beauty parade when appointing a fiduciary manager.
Jeremy Goodwin: A beauty parade is absolutely essential as trustees have got to be aware of the different options for outsourcing, given the importance of fiduciary management and what is being delegated. From a legal perspective, trustees can ensure they are not liable for the consequences of their investment decisions [by delegating] the decision-making power appropriately… and [ensuring] it is then being supervised properly. Therefore they really need to understand the variety of providers out there and whether they are getting the right offering for what they are trying to achieve. In terms of how they supervise the manager, this can be a real challenge [to their relationship].
With the range of providers out there, lots of them [offer] a bundled service where there is only one fee. Actually, underneath that bundled service there is the whole range of different fees built into it.
Certainly, one of the key things… is for trustees to make sure they know what questions to ask at the beauty parade, and there are a lot of potential issues which need picking up at that time.
Pensions Week: Are trustees picking up on this? At first it did not seem like many trustees were going to open tender.
Patrick McCoy: That is an interesting one. If you ask the consultants they will tell you that all their selections are done in the open market through full competition. If you ask the asset managers they seem to disagree. They believe that consultants are flipping their clients and they are not seeing the open tenders. One of those two parties is wrong.
Pensions Week: Do you have any thoughts on who that is?
McCoy: The answer is that I do not know, because it depends what you mean by ‘open competition’. I think there are different variations on it. Trustees are very capable of running a process themselves, but they do not know what they do not know. That is the challenge. When we started doing this work I was staggered by just how difficult we found it, because you have to know and understand the issues, from strategy through to execution and from contracts through to implementation.
It really amazed us how difficult it was to understand what they were providing, and then to get a really good understanding of the individual providers. We are there now, so we can see the massive difference between the providers. I really struggle to see how a trustee would get that if they were not taking independent advice.
Shamindra Perera: Pension plans are funding the development of the fiduciary management businesses of the consultants. Consulting and fiduciary management are completely different. Consulting is advising scheme trustees on setting strategy; fiduciary management is taking accountability for making day-to-day investment and risk-management decisions and executing them. They are very different.
McCoy: That is a bit harsh on the consultants. [They] do two things really well: they are really good at the strategic advice, the high-level decision-making, and they have fantastic relationships with their clients. When we run tenders in the open market those two factors come through every single time, and clients really value the relationships and the strategic mix. They trust them to do the execution, and that is why they are winning.
We talk to them about the importance of scale, and these guys have so many clients and so many pension scheme assets, that they get access to the very best hedge funds, [that] have limited capacity but will say, ‘because x consultant is such a major customer of ours we will reserve 50 per cent of our capacity for their clients.’
Perera: I might have an excellent long-standing relationship with my gardener; he has done a fabulous job. However, if I want to build an extension into my garden I am not going to ask my gardener to do it. I am going to get a builder who has the skill set to build the extension – although it is in the garden.
Christy Jesudasan: Selecting a fiduciary manager is a complex task. It requires more than an hour’s beauty parade meeting, but actual in-depth due diligence and site visits. Even in the Netherlands, where fiduciary managers have well-established track records, trustees still undertake much more extensive due diligence than is sometimes seen in the UK.
Anton Wouters: I am coming at it more from the Dutch market perspective, and there we have already taken the second step. The initial onset of fiduciary management involved pension funds that were not sophisticated in setting up the governance of their fiduciary mandates, and so essentially gave them away without a proper governance structure.
Back in 2008/2009 the crisis took many funds by surprise, and many were badly affected, partly due to the little restrictions they had defined with their fiduciary manager. The rules of what the manager could and could not do were unclear, and it ended up with the manager thinking they could do more than they actually could.
Realising this, the Dutch central bank turned around and said, ‘first of all, let us take a step back, understand what we are doing, and ensure we make clear the rules for how fiduciary management works.’ They could see the need for fiduciary managers to be more transparent and to actually educate the clients. A clearly defined set of governance rules on how we manage a fiduciary portfolio must be agreed.
Brian McCauley: Given the importance of the decision from a regulatory point of view, and the breadth of services you are asking the provider to make, it seems to me they are taking a big risk by not going down a completely open and transparent tender process.
Just because you have a good relationship does not mean [it] is the right service provider for the scheme. I do not think the number of fiduciary management mandates awarded equals the number of open tenders. But it is certainly something we suggest should be happening every time. It is such a big decision. In the traditional consulting model, if we were to appoint a new global equity manager we would certainly have a beauty parade. This decision is infinitely more significant.
