Thursday, 21 September 2017

    With a little help from my fiduciary

    Trustees overwhelmed by their investment workload have a new place to turn: fiduciary managers. Alastair O’Dell asks whether this is a step too far

    For trustees facing a heavy workload and market conditions that are challenging even for professional investors, the option of delegating responsibilities may well be a tempting one. Help, in the form of independent trustees and consultants, has long been at hand. But now another form is available, the fiduciary manager.

    But what is a fiduciary manager? Juliet Bullick of BlackRock, an asset manager that also provides fiduciary management, describes it as “a delegation of asset allocation, investment structure and manager selection,” but says there are a number of variations for trustees to choose from. “It should give the board of trustees the ability to focus more on the key, strategic issues of the scheme.”

    Research by Xafinity Paymaster found that 65 per cent of pensions professionals in the UK thought that reducing risk and overheads by outsourcing non-core functions, including fiduciary management, was a ‘hot topic’. The trend has also caught on in several countries – 60 per cent of Dutch schemes have one – so should UK trustees be considering it?

    Delegation and duty

    Steve Delo, independent trustee for PAN Governance LLP, says that successfully creating a diversified portfolio is “possibly beyond the majority of lay trustees”. To solve that problem, trustees could opt to take on an independent trustee with investment expertise or lean much more heavily on their consultant – both of which involve transference of power.

    However, if trustees hand over an area of responsibility because they do not fully understand the issues behind it, that is a different consideration. Says Delo: “You are asking the consultant to make some of the decisions for you. There are arguments in favour of that but then there is a governance gap to fill. If the consultant is taking those decisions because you do not think you are able to, it makes it very difficult for you to monitor what the consultant is doing.”

    If trustees delegate investment decision-making power to a fiduciary manager, that does not mean the responsibility behind those decisions is delegated. Trustees are still on the hook for the outcome of key decisions.

    It’s important, then, to balance the benefits of freeing up time to concentrate on strategic decisions, with the negative effect on governance of being separated from some decision making.

    Fears that companies which offer both fiduciary and asset management services will invest in their own products, rather than getting the best results for the scheme, also need to be allayed. In the case of BlackRock, Bilet says: “We can agree a maximum of in-house managed products with the trustees and put that into a contract. And we do have strong manager selection capabilities – we use a external managers where we do not feel we can offer best in class.”

    If your scheme is considering fiduciary management, it’s essential to satisfy yourself that a potential fiduciary manager is being objective in its choice of investments. Some key pointers for the due diligence phase and for ongoing monitoring include looking at the experience of the fiduciary manager, getting references from existing clients and perhaps putting limits on the amount of funds run by the fiduciary manager’s own asset management division.

    The devil is in the detail

    The above points lead neatly on to what should be included in a fiduciary mandate. As with any mandate, a lack of clarity at this point can store up problems for later. The eventual contract should be comparable to a pension scheme’s statement of investment principles.

    The Merchant Navy Officers Pension Fund (MNOPF) awarded what was at the time the UK’s biggest fiduciary mandate last autumn. Consultant Watson Wyatt has taken responsibility for investing the scheme’s £3.2bn of assets as well as selecting and monitoring asset managers.

    Watson Wyatt’s Advanced Investment Solutions (AIS) – it does not use the term fiduciary management – has over 30 clients inlcuding the MNOPF. The consultants’s involvement can range from taking responsibility for all a scheme’s assets, to just managing a small part of a portfolio.

    Paul Deane-Williams of Watson Wyatt says: “MNOPF is at the high end of the AIS spectrum. The mandate covers all the assets and we are highly engaged in the decision making.”

    Deane-Williams says that Watson Wyatt encourages pension funds to align their investment strategies with their governance. If they have a lot of time, resources and expertise then they can more successfully engage in a sophisticated investment strategy.

    Trustees should also realise that the benefits of delegating are not going to be immediately quantifiable. Bullick says: “How quickly would you see the benefits of improved decision making? It could take a while to come through. You need to take a long time view.”

    It is tempting to think that a fiduciary manager could achieve better returns because they are more ‘plugged into’ the market than some trustees. However, Delo warns: “You may buy into the concept because you want to use their ideas, but how do you know they are continuing to take the same approach in the future?” Due diligence and monitoring are essential. The ongoing solution may involve independent governance input to evaluate what the fiduciary manager is doing, adding further expense.

    What actually changes?

    The fiduciary management model that most schemes follow today transfers the investment decision-making work to a consultant or independent trustee. One argument in favour of a dedicated fiduciary manager is that they can extract economies of scale from putting a lot of investment activities under one agreement. The question is whether trustees feel a fiduciary manager is best placed to make decisions on investment strategy, asset allocation and tactical investments.

    The popularity of fiduciary management in the Netherlands was stimulated by regulation which is not necessarily going to be replicated anywhere else, including the UK. Legalities aside, however, the governance challenges that non-professional trustee boards face are comparable with those of the Netherlands and elsewhere.

    The fiduciary manager route is best suited to medium to very large schemes, because of cost considerations. It is ultimately up to trustees to choose who they think they can best work with.

    Powers from the people

    Powers that can be delegated to a fiduciary manager include:
    • accountability for investment performance
    • risk modelling and/or management
    • selection/monitoring of external managers
    • implementing asset allocation including tactical investing (which some view as particularly important)
    overall reporting and analysis of the total mandate.

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