The increased sophistication of pension plan sponsors and their willingness to explore new avenues in search of higher investment returns have led to exposures in a wider range of markets and asset classes than has been seen before.

This move has heightened the need for an explanation of return, rather than just the calculation. As global custodians are becoming more involved in performance measurement they are finding increasing demands for attribution analysis from clients. The calculation of a rate of return is just the start of a long and complex process requiring more sophisticated services to meet clients' needs.

In the UK, this trend will be given fresh impetus by the implementation of the 1995 Pensions Act. From a performance evaluation standpoint this de-emphasises the importance of peer group comparison and emphasises the analysis of results against a fund's chosen benchmark.

Custodians involved in monitoring performance are well placed to provide the detailed attribution analysis required to identify the variation in return against the benchmark due to factors such as country allocation, security selection, curency effect and hedging activity.

We are also finding that, coupled with this interest in how investment managers are generating returns, there is an increasing appetite from clients for the additional risk measurement techniques that can be provided. Standard deviation has been the most widely used of these techniques expressing volatility as the amount by which return has deviated from its historical average, but other measures are now being used. Investors are expecting those providing services to be able to offer a variety of these measures, as no one single method can give a satisfactory level of comfort.

More recently, investors have been seeking to apply ever more complex risk management techniques to analyse their investments. The technique getting most attention is value-at-risk (VaR), which seeks to identify the maximum that a portfolio could lose over a certain time, based on a given confidence level. The methodology is based on an analysis of the volatility of, and correlation between, asset classes. We in collaboration with J P Morgan are adapting these techniques to meet the financial objectives of pension investors. Clients will increasingly demand these services as awareness of VaR increases.

Mark Saward is a director of State Street Analytics Europe

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