Is it possible to compare fiduciary managers on performance?

Carolyn Tavares: Publishing performance is something we have been doing for decades. Our GIPS (Global Investment Performance Standards)-compliant composites, which date back to 1994, reflect the performance of our fiduciary management business. Our composites capture the performance of our clients for whom we manage all or a portion of the assets, as well as relationships with different levels of discretion.

As an asset manager providing fiduciary management services, showing performance and demonstrating it should be standard practice. While I think the question is a good one, the question we often hear from trustees about performance is a slightly different one: are they receiving the right reporting through their current model – FM or traditional consultant – to evaluate if investment decisions really are adding value?

We need to be careful and not imply that traditional consulting relationships are unsound

Pieter Steyn, Towers Watson

Pieter Steyn: What we are seeing in fiduciary management is a greater use of the full suite of tools available to investors. One tends to see more liability hedging and greater use of diversity than you would see in a traditional consulting relationship. During the recent market volatility both these aspects have helped.

However, we need to be careful and not imply that traditional consulting relationships are unsound. Many traditional relationships are very good with lots of engagement and strong risk management.

Ian Smith: Is the provider able to make the argument that fiduciary management works better across the board than the traditional relationship?

Shamindra Perera: We do that all the time when we are in a pitch situation and in client situations. The two gentlemen either side of me oversee us on a couple of our different fiduciary mandates – or their organisations do, obviously. I have to prove to them that, on those mandates, we are delivering what we set out to deliver and that we are delivering those things to plan. 

I think it is being done.

Smith: We are talking about having some kind of evidence that fully delegated fiduciary management performs better than the traditional approach. That is the difficulty, is it not?

Perera: I think it is. If I draw a parallel with active management, I can look at the Russell suite of active management funds and say, ‘80 per cent of these funds have beaten their benchmarks and 90 per cent of them have beaten their peer group median over the past five years’.

However, if I then look at the average active manager universe, it would have underperformed. I cannot therefore talk about the average or whether fiduciary management works. I can say my solution works or my funds work at a client level.

I think asking whether fiduciary management works is similar to asking whether active management works. It is not a question I think should be asked; that is probably why there is not an answer to it.

Tavares: With active management you also at least have public index benchmarks to compare with passive management. With fiduciary management, the Pension Protection Fund provides aggregate funding levels, but comparing with the aggregate ignores differences across schemes such as asset allocation.

Instead we think it’s about getting performance reporting that evaluates whether the decisions being made and the advice being received are adding value.

I cannot talk about the average or whether fiduciary management works. I can say my solution works or my funds work at a client level

Shamindra Perera, Russell Investments

Brian McCauley: There is evidence out there around how good governance adds value. If you get good governance through your traditional arrangement or an existing arrangement, great, but the whole concept of fiduciary is to try and improve that governance management solution. 

And if the plan is managed well, whether it is traditionally or through fiduciary, that it is proven to add value.

Smith: Is that all we are ever going to have? We are not going to have that universe of fully delegated providers to compare?

McCauley: Because every provider will claim it is tailored to the client and every client will have a different benchmark. My job is to challenge that quite rigorously because some of those benchmarks are not worth very much and quite easy to beat. We just need to be very careful; I think these arrangements need a third-party evaluator to come in and sense-check it.

Smith: So what would you do in terms of benchmarking managers against each other?

McCauley: It is not necessarily against each other; it is against are they doing right by the client? So, are they using their discretions appropriately? What if, when they took on the arrangement, they kept it exactly as was, so then we could prove it is run in a more efficient manner; they are using the tools of diversification and liability-driven investment better, so is it a more efficient portfolio?

You can measure that, but also, are they using their discretion appropriately? It is digging down to it. I am not sure we will get to a point where there will be league tables of fiduciary providers saying, ‘Russell got a 5 and GSAM got 5.1,’ it does not make sense.

Simon Cohen: It is interesting because we dealt with a scheme recently where they have two sections: one using a traditional approach and another, a fiduciary approach. We looked at the growth portfolios of the fiduciary against the non-fiduciary, where the non-fiduciary is a diversified growth fund.

We asked, ‘How have the fiduciary growth assets performed against DGFs? Has the manager added value by being fiduciary?’ So there is a metric you can compare them against.

This roundtable was chaired by Pensions Expert editor Ian Smith