In a hard-hitting document calling for a rethink on many areas of pension fund invest-ing, the consultant said that delegated consulting, or the appointment of in-house investment professionals, represented the best hope of improved governance.
The document, entitled Defining Moments, also calls for a solution to rising investment fees, which have so far been resistant to downward competitive pricing. It heralds a move to investing relative to absolute return rather than a market index.
Making the case for fiduciary management, Tim Hodgson, a senior investment consultant at Watson Wyatt, said funds should be maintained by professionals on a daily basis, not by committees that met once every three months.
The consultant admitted that its proposals could lead to the loss of advisory work if clients subsequently appointed chief investment officers whose role would be to select fund managers.
Hodgson said advice had influenced a client – the fund of a financial services firm – to start the process of appointing an investment officer.
He also reasoned that its future likely relationship with such clients was to give advice on alternative investment managers, with the selection of traditional asset managers done by the fund.
Hodgson admitted that the firm’s views on fiduciary management were not currently shared by many of the trustees it advised.
He added that the big rise in investment fees seen by pension funds was likely to lead to what he termed ‘beta creep’, as funds sought smarter ways of getting the same returns for lower fees.
In another new document relating to views on fees, Craig Baker, global head of manager research at Watson Wyatt, said: “Investors naturally assume that they are paying these high fees to reward manager skill, or alpha. But in most cases they are wrong.”
David Rowley
