What are the relative strengths of asset managers and delegated consultants?

Brian McCauley: It is not unsurprising where the original strengths would lie: you would expect the asset managers to be very good at execution, transition management and risk systems. They have been in those businesses for years and they continue to invest in these services.

You could argue that, in the early days of fiduciary, the consultancy world was better at building flight plans, or understanding the end game, or understanding liabilities a bit better. That is probably fair, but things have evolved an awful lot since then.

Traditional consultancies have invested a lot in risk systems, platforms and asset management. In the past it was easy to say, ‘You are good at that and you are good at that,’ but is not so easy any more.

Simon Cohen: 

You could argue that, in the early days of fiduciary, the consultancy world was better at building flight plans, or understanding the end game… but things have evolved an awful lot since then

Brian McCauley, Buck Consultants

I completely agree with that; it is very much a more level playing field these days.

You have asset managers recruiting more consultants into their fiduciary teams and vice versa; the same is true around the building and development of systems. Maybe now it is more about perception rather than reality.

Ian Smith: Carolyn, have consultancies caught up with you on execution?

Carolyn Tavares: Our expertise comes from much more than just execution. It comes from idea generation and experience putting investment ideas to work in portfolios.

We know multinational clients that have been able to compare different fiduciary management models across regions and have found that the speed of identifying and implementing ideas was much, much faster with the fiduciary managers who are also asset managers.

I think this comes from the fact that we sit within an asset management business and have the benefit of not just our 80-plus fiduciary management team, but also of the 2,000 investment professionals across the globe.

Our expertise comes from our culture of risk-taking and the scale of resource, which is institutional within our asset management business.

Smith: Is there anything you can learn from implemented consultants?

Tavares: Traditional consultants have been awarded the lion’s share of the market in fiduciary management up until now. They have, historically, had the relationships with clients.

While I recognise that has been a challenge to asset managers over the past few years, we are starting to see the tide shift, as fiduciary management becomes a more mature market and trustees are seeing the benefits of an asset management model.

Smith: Pieter, what unique skills do you have, coming from a consultant background?

Pieter Steyn: The obvious one is having a strong heritage of understanding the liability structure and building a portfolio that is specific to a client’s objective versus that liability structure.

Fiduciary management has also evolved to become more liability-oriented. It started with something that is more like a benchmark mandate: a series of asset class indices against which the fiduciary manager is operating.

However, as pension funds have become more comfortable with delegation, it has evolved towards something that is more closely aligned with a client’s ultimate objective: managing versus a flight plan.

This type of mandate is also very closely aligned with a consultant’s skillset. Therefore, we see ourselves having an edge in that area.

As fiduciary management becomes a more mature market and trustees are seeing the benefits of an asset management model

Carolyn Tavares, GSAM

However, I think one of my industry colleagues on the third-party evaluator side is also right that, over time, things have evolved a lot on the operational side.

Investment consultants are now subjected to lots of operational due diligence and need to be credible.

Shamindra Perera: I agree with Carolyn on the resources. For instance, having a trading desk that trades 24 hours, which the portfolio managers are linked to directly, confers a significant advantage for both investment decision-making and execution.

Consultancies do not have that link directly with the marketplace.

However, I think it goes beyond that; it goes beyond the resources that you can hire; it is a culture. Culture is ingrained in organisations and is extremely sticky.

Tavares: It is a culture, absolutely.

Perera: There is a culture of making investment decisions, not just day-to-day, but intra-day, being accountable for that and being comfortable that there is no way you are going to get all of them right.

You are doing well if you get five-and-a-half to six out of 10 of your decisions right. That takes a very different culture and mindset to that of an investment consulting firm, which is much more conservative – they do not want to get anything wrong. You cannot change overnight by hiring people or by investing in back-office resources.

Stuart O’Brien: When you look at most fiduciary management agreements they tend to look like investment management agreements with a little bit added to them. So that’s how we tend to review them – in the same way you would review an investment management agreement if it was for 100 per cent of the scheme’s assets.

When you think of it like that it is probably the most important investment management agreement a scheme will ever enter into; you want to make sure everything is right and meets the scheme’s needs, as well as thinking about how you would exit from the agreement if you ever needed to.

If you go to partial fiduciary management, the models there can be quite different.

You might have an IMA for a small part of a scheme’s portfolio or you might have a standalone pooled fund that has been set up by the fiduciary manager.

So what we look out for, as legal advisers, is definitely different depending on the nature of the legal construction of the relationship.

This roundtable was chaired by Pensions Expert editor Ian Smith