This week we consider how pension funds can consider performance in two areas of their investments: diversified growth funds and fiduciary management.
In both cases, the question of performance is tricky – or, the cynic would say, made more tricky than it should be by providers. With DGFs, many schemes have entered based on the lure of equity-like returns with less volatility. If those funds have not participated in all the upside of financial markets, can they really be blamed?
“It is not the performance, but the reaction of the fund manager to events that is important,” argues JLT Employee Benefits’ Allan Lindsay in an roundtable to be published later this month on pensions-expert.com.
Schemes cannot have their cake and eat it: they will get the benefits and drawbacks of any equity correlation they choose. The popular refrain is to know your goal and judge managers against it.
Illustration by Ben Jennings
But despite the variety of strategies’ risk and return profiles, institutional investors do need to be able to take a step back and judge whether such investments were a good deal in the first place.
How much volatility was really taken away? What did you pay for it? Where would you be if you stayed in equities? Schemes may come to regret placing so much trust in managers’ asset calls.
A similar challenge revisited this week is evaluating your fiduciary manager or delegated consultant: another area where proponents argue strategies cannot be compared like for like.
The message of our Technical Comment writers last week was to use a variety of metrics: judging providers against the market, against peers, against funding level, as well as qualitative assessment of the manager’s approach.
Execution is absolutely key in this area. Is your implemented or delegated consultant able to execute the investment decisions you need? Does it have the team and the background to do so?
Is your fiduciary manager able to understand the wider risk profile and governance needs of your scheme, as well as your employer covenant and how it impacts on your investments? Are they providing the growth you need?
The growth of fiduciary management evaluation is welcome. But I would argue schemes need to keep the decision to delegate in any area of their management under constant review.
Ian Smith is editor of Pensions Expert. You can follow him on Twitter @iankmsmith and the team @pensions_expert.
