The advent of fiduciary management was hailed earlier this month by a report called Defining moments, produced by Watson Wyatt.
The document also called for the end to ever rising fund management fees and advocated ‘beta creep’, the emergence of passive fund management strategies with small amounts of alpha added to them.
The report is interesting in that it has not been endorsed by Watson Wyatt clients. Indeed, Tim Hodgson senior investment consultant at Watson Wyatt, said that many of its clients probably disagree with its thoughts on fiduciary management. This has been largely borne out in the following responses from pension fund managers and trustees.
1. Watson Wyatt have said that fiduciary management, either in the form of delegated consulting or in-house investment staff, is an unstoppable trend. Do you agree?
Trustees have flinched at the suggestion that they need to change their way of working. This almost certainly reflects the make-up of the Trusty 30 survey, which is weighted towards trustees at well supported funds with best practice. One comment from a trustee summed up responses by saying: “There is a long way to go yet and the current model may well remain indefinitely.”
Perhaps such responses would not be so common at smaller and less secure funds. Some trustees, however, agree with Watson Wyatt.
“Investments have become increasingly complex, and trustees need to ensure they have the appropriate level of expertise to ensure they do not miss appropriate opportunities and that they fully understand the risk/reward issues of their decisions. Therefore, there is a need for increased support,” said one trustee.
2. Are you currently considering implementing or increasing the amount of delegated consulting?
There was an emphatic no to this question from trustees.
3. Are you currently considering implementing or increasing the amount of in-house investment expertise?
Trustees were split on this; around half admitted that they were looking to increase numbers and training in this area. One said: “With a strong in-house team, I do not see a need for additional external help on an ongoing basis, but the in-house team has been restructured to match the changing investment strategy, with staff being charged with acquiring a knowledge of targeted new areas.”
4. In its Defining moments document, Watson Wyatt said fund managers had failed to respond to normal market logic by lowering fees to respond to high competition. Do you agree?
Trustees were largely in agreement with Watson Wyatt on its view that investors needed better value for money from fund managers.
One said: “Fees are always an issue, particularly when returns have been disappointing and fund managers do not appear to be sharing to the same degree as the reduced financial returns faced by funds. High fees are easier to feel comfortable with when returns are good in real terms.”
Though, this subject begs the question of whether investors should just be smarter about choosing the best managers. One said: “If they’re good enough, managers should be confident they are worth their fees.”
This is all relative, as Craig Baker, global head of manager research at Watson Wyatt, said: “Flaws in fee structures tend to become exposed when markets falter, and many managers will no longer be able to justify their charges without beta to bail them out.”
5. Watson Wyatt predicted the rise of what it called ‘beta creep’, which it defined as gaining small amounts of alpha from otherwise passive portfolios as a way of reducing fees. Is this a strategy that you are interested in or already pursuing?
There was a marked split on this question; those that said yes either defined this as something they were doing already, were interested in or were about to implement.
One said: “We have split our main asset classes between alpha and beta. Taking a passive low cost approach to the management of those assets where the return will be dominated almost entirely by beta, and paying higher fees for manager skill where it is clear there is potential to get significant alpha.”
