Roundtable: William Parry from Buck Consultants, HR Trustees’ Giles Payne, Russell Investments’ David Rae, Ralph McClelland from Sackers and Towers Watson’s Pieter Steyn, consider the more difficult elements of fiduciary management, in the second part of this roundtable series.
Pieter Steyn: It is quite important for everybody to be very clear about who is responsible for what at the outset.
Full fiduciary management involves both the advice on the plan as well as the execution of that plan because then you have the two things speaking to each other. So when a client reviews the process each quarter or each year, it can say, ‘How has the fiduciary manager done versus the plan, and secondly, do we still have the right plan?’. And you have someone in the room that can help you with both of those questions.
William Parry: [Trustees] want the access to these asset classes they would not otherwise have. What is important is they still have the kind of commonsense touch, explained in plain English, on what is actually going on within a strategy.
This comes back to the importance of ongoing monitoring and understanding. From a trustee governance point of view, they still have to retain that oversight of what is going on within the investment strategy.
David Rae: There is some value in the work that is going on to try to quantify [manager performance] in a systematic fashion, across providers.
As with any investment management, we will all be familiar with this notion that past performance is no guarantee of future results, and trustees need to bear that in mind when they think about appointing a fiduciary provider.
Actually, while the track record shows you how they have done over a certain period of time, trustees need to assess whether that solution is going to work for them going forward.
It is quite important for everybody to be very clear about who is responsible for what at the outset
Pieter Steyn, Towers Watson
Giles Payne: It is really interesting having fiduciary managers report to you because they are undoubtedly very well positioned and you get a lot of concentration on the things that have done well and not so much concentration on the things that have not gone well. So I try to ask about the things that have not gone so well.
Parry: Having that independent, slightly more experienced voice in the room is really important, and obviously when things go wrong you do need to ask difficult questions. It is not necessarily to catch the fiduciary manager out or anything like that; it is more to clearly put the perspective from the trustees’ point of view. It just helps both parties understand what is going on, which is key.
Ralph McClelland: As a cynical lawyer, I always think you need to know how you are going to get out when you go in.
If you are going to use a fiduciary manager, one of the reasons you are doing it is that you want access to more complex strategies. So however you get there, there may be consequences for liquidity. You just have to accept that.
This is particularly interesting in the alternatives space and particularly the hedge fund space, where my perception, possibly a rather unscientific one, is that there is probably more interest right now.
Payne: It is very interesting to see how hedge fund [fees] has evolved as well.
We were talking earlier about the funds of hedge funds – various aggregators – but the cost associated with that was hedge fund costs on top of hedge fund costs, which meant you were going to be seriously hamstrung trying to get any real returns out of it.
And now the more fiduciary style is coming in, looking at a more holistic approach to the charging, and that you do not get the one-and-10, two-and-20-type charging coming through to the same extent. And therefore it is more feasible for pension schemes to get a portfolio of different hedge funds that do an efficient job, and it can be more tailored as well.
Steyn: Funds of hedge funds have brought their fees down, compared with where they were. But my sense is the fiduciary managers can have an even greater focus of the cost of all these arrangements.
People often just look at net returns, so when returns are 10 and fees are one, you get nine. But when returns are three or four and you take one out of that, there is a lot less left. So I think in a lower-return environment, cost management is particularly important.
Parry: Going back to the point about the clarity of fees, this is something we have noticed that is less consistent across fiduciary managers: some are very clear, which is excellent, but some are not.
If you are going to use a fiduciary manager, one of the reasons you are doing it is that you want access to more complex strategies. So however you get there, there may be consequences for liquidity
Ralph McClelland, Sackers
We have seen cases where hedge fund sleeves, with high costs associated, sit outside of the main fee arrangement. This is not always explained clearly to the client.
Often there will be a central fee agreement and then kind of bolt-ons for complicated strategies, essentially charging more and passing that through to the client. That is where it is very important to make sure you have the ongoing clarity and that people know what is going on and that is being communicated properly.
That is also where it is important to have more of an independent view of how the fiduciary managers and the hedge fund managers are putting their offerings together.
McClelland: Fiduciary might offer quite an interesting solution to some of the governance issues associated with hedge funds, particularly smaller hedge funds, where I think there is a perception that there might be more opportunity for growth. We have seen a number of clients who are looking at this and trying to get to grips with selection, churn and ongoing governance.
Managers out there that are able to target that need will probably do quite well, because the alternative is you try and do it yourself or form your own fund of one, where you try and just run it all yourself. Even quite big clients, I think, would struggle with that, not only from a governance perspective but actually from an expertise point of view.
So if people are really desperate for returns, then that is an obvious area to be focusing on, and that is a space I will be watching.
Read the other three sections of this roundtable series:
