Is fiduciary management right for your scheme?

Its proponents say it can help schemes improve investment strategies without running the gauntlet of selecting managers and getting bogged down in the minutiae of different funds.

But its detractors believe it lacks transparency on performance. A survey from consultancy KPMG last year found 75 per cent of new mandates were won without a competitive tender process. So how can trustees decide whether fiduciary management is right for their scheme?

The first step, said Richard Butcher, managing director at professional trustee company PTL, is to decide what the scheme is trying to achieve, as well as its needs, before assessing exactly what different managers are offering.

There’s a big asymmetry in knowledge between trustees as the buyers of services and the providers who provide these services

Shamindra Perera, Russell Investments

“It’s not clear what fiduciary management is,” he said. “We all understand the principles of delegating the investment function, but different managers provide that service in different ways.”

Trustees would then need to decide the level of involvement they require, Butcher added, as they typically want to be involved in more than just discussing the strategic asset allocation, but avoid being dragged into day-to-day trading.

Smaller schemes typically hire fiduciary managers to manage their entire investment portfolio, but large schemes favour only delegating sections of their portfolio to a manager.

Butcher said certain parts of the portfolio work better than others when outsourced. “[Delegation] lends itself better to more active parts of the portfolio,” he said. “Mostly, that’s the growth part.”

Partial delegation happens when large schemes want to access esoteric assets, said Giles Payne, director of professional trustee company HR Trustees.

He said: “For some types of investment, [fiduciary management] is the most cost-effective way of accessing them… A lot of fiduciary managers get the bulk wholesale rate.”

Fiduciary management services are commonly spun out from investment consultancies or asset management companies.

“Specialist asset managers would be more [for] people who wanted a particular approach," said Payne, but added take-up is still dominated by the consultancies, which he said indicates they are converting existing consultancy clients into users of fiduciary management. “That’s changing over time.”

Effective benchmarking

Payne stressed the difficulty in comparing performance among fiduciary managers due to differences in modelling and approaches, but said some consultancies were developing services to benchmark providers.

Shamindra Perera, managing director of institutional investment services at Russell Investments, a provider of fiduciary management, said the strategy was useful for addressing the different levels of knowledge between trustees and investment managers.

“There’s a big asymmetry in knowledge between trustees as the buyers of services and the providers who provide these services,” he said. “In most other fields there isn’t this gap in knowledge. They don’t have the ability to challenge.”

Perera said schemes should delegate their entire portfolios if they choose to enter fiduciary management, as partial delegation misses some of the benefits.

“[Partial delegation] is asset management, in my view,” he said. “If you believe it is important that your pension fund be managed as a total pool of assets, the only person who can do that is a fiduciary manager. Fund managers are doing it in silos.”