Surfing the second wave of fiduciary management
After the first wave of full-service fiduciary mandates, Dutch pension funds are beginning to pick and mix asset managers' fiduciary offerings. David White reports
The decision by the TNO pension fund to appoint BlackRock to manage a €2bn fiduciary management mandate signalled a new direction in the development of fiduciary management in the Netherlands.
Although TNO has given BlackRock the key roles of lead overlay risk manager and strategic adviser, it has kept the management and selection of managers for its equity and alternative portfolios in-house.
This pick-and-mix approach to fiduciary management distinguishes what might be called the second wave of fiduciary managers. The pattern for this was established last year, when the SBZ pension plan chose ABN AMRO Asset Management to be fiduciary lead overlay and risk manager and Russell Investment Group to be its manager of managers in a €2.2 bn fiduciary management mandate.
André van den Heuvel, head of institutional sales for the Benelux region at BlackRock, says the mandates reflect a development in the way fiduciary management is being offered by asset managers.
"In the beginning, fiduciary mandates were all basically the same - they had the same type of model. A pension fund would outsource all tasks to one fiduciary manager. Some asset managers have been successful with this approach.
"During the last year, however, we have seen a type of model being put into practice where there is a split between the different roles of a fiduciary manager, which is, on the one side, the strategic role of the fiduciary management mandate and involves monitoring and managing the overall risk parameters and objectives of the fund, and, on the other side, the external manager selection role.
"In the SP TNO mandate there is this very clear separation of the roles and duties. BlackRock provides the whole range of services from ALM on to strategic risk budgeting, strategic portfolio advice, portfolio construction, overall risk management (including completion portfolios) and integral reporting. TNO is and will remain responsible for selecting external managers, whereas with many other fiduciary mandates that responsibility is outsourced to the fiduciary manager.
With this there is also a clear responsibility set. As always the trustee board is still responsible for setting the strategy plan, but the internal staff is still responsible for selecting the external managers and therefore its performance.
"SP TNO has a lot of internal expertise, developed over many years, and they thought it would fit the model to keep that expertise in-house." he explains.
Van den Heuvel says that BlackRock was happy with this division of roles, for three reasons. First because BlackRock would handle the key fiduciary tasks - advising the strategic guidelines and the strategic risk budget and designing the portfolio construction, which together account for some 80% of the performance of a fiduciary management mandate. Last but not least, BlackRock would fulfil the role as lead overlay risk manager and as such measuring, monitoring and managing SP TNO's overall objectives within the determined risk framework.
Second, because they would be available to advise SP TNO on external managers selection, if TNO wanted to replace a manager. We would also advice on a pro-active basis if we think a specific manager would not fit the overall composition of the portfolio.
Third, because BlackRock is managing the €500 million fixed income portfolio. "This was not decided at the beginning of negotiations, but since BlackRock has an excellent track record in fixed income, it was a natural step,"
Whether other pension funds follow the SP TNO model depends among others on their size, internal organisation and specific professionalism, van Den Heuvel says. "The fiduciary model used here is typically equipped for the bigger pension funds. The smaller and mid-sized pension funds with few internal staff are more likely to opt for the ‘traditional' fiduciary model, outsourcing almost everything, including external manager selection, to one fiduciary manager."
The customisation of fiduciary management offerings is a logical development of fiduciary management services, says Bart Heenk, managing director with responsibility for the Benelux and Nordic regions at SEI Investments, which acquired eight new fiduciary management clients in the Netherlands last year.
Heenk sees two broad developments in the market for fiduciary management. "The first development is a proliferation of suppliers of fiduciary management," he says. "What many asset managers have done is put a brass plate outside their building saying they are now a fiduciary manager. That has created almost by default a number of approaches, because what asset managers define as fiduciary management will vary from house to house.
"The second development is that everybody is genuinely trying to service the different needs of pension funds, and they are aware of the fact that there has to be some flexibility in the model that is going to be implemented.
"Not every pension fund wants to do the same thing. Some pension funds are happy to outsource everything. Others feel vulnerable and want to retain a greater degree of control."
Partly to reduce this vulnerability, some pension funds have split a fiduciary management mandate to two managers rather than one, he says. "The thinking here is that, if you outsource your activities to one provider, you are far more vulnerable if that provider were to disappear, either because you don't like their performance any more or because the service they provide is not up to standard." The other reason to split a fiduciary mandate over more than one provider is that not all fiduciary managers offer a full solution.
Heenk says it is important for a pension fund to retain in-house expertise, or be prepared to buy it in, when it awards a fiduciary management mandate "It is important to keep some knowledge in the fund, crucially the knowledge that enables the pension fund to evaluate the performance of its fiduciary manager," he says.
"You need to be able to maintain knowledge in-house, or buy it in from a consultant. But you need to be always able to evaluate whether the fiduciary manager you have chosen is still the right one for you."
Heenk compares the situation with pension administration. "Fiduciary managers, like pensions administration, are so important to a pension fund that you don't change them on the spur of the moment. Changing an asset manager is much easier."
Some pension funds have chosen to use a fiduciary manager as a consultant, Heenk points out. "Here, the pension fund will keep ultimate responsibility for the hiring and firing of external managers but they will be advised on a continuous basis by an adviser. For me, that is the role of an adviser, not a fiduciary manager."
As providers of fiduciary management have proliferated, so pension funds have become more precise about what they want, Heenk suggests. "As pension funds get a better idea of what fiduciary management can mean for their organisation they are beginning to define their requirements," he says. " Suppliers of fiduciary management solutions will have to become more flexible to accommodate those wishes, and that is a very healthy development in the market."
Yet a pick and mix approach to fiduciary management, whereby a pension fund hires two managers rather than one, has its drawbacks, Heenk suggests. "Pension funds will have to be more proactive and hands-on if they are to ensure that the two providers work well together."
No single model of fiduciary management is likely to predominate, he says. "Solutions will be tailored to the situation of the pension funds. There are many different situations of pension funds and there should be almost as many solutions."
Manager of managers skills will remain central to any fiduciary management offering, Heenk says. "From a pension fund perspective, the manager of managers element of it is probably going to be a common denominator, and all the extra services are the things that pension funds are going to have to determine - what it is they want to keep in-house, and what they are prepared to outsource." This development has led SEI Investments to reposition itself in the Dutch market from a manager of managers to a provider of fiduciary management, Heenk says. "Since we started in the Netherlands three years ago we have moved more towards a fiduciary management concept.
"Initially we positioned ourselves as a manager of managers but we recognised that this didn't always solve all the problems that pension funds have. So we have added the services that we have provided for some time in the US as part of our fiduciary management offering.
"We now have the flexibility to implement it in the way the clients want us to do. So from that perspective the current development that it's horses for courses rather than a one size fits all solution is playing to our strengths."
Heenk says that SEI Investments would work happily in a fiduciary management arrangement where the pension fund retains some control of investment management. "We are not defining how a pension fund needs to solve their problems, and we could see a situation where a pension fund outsourced part but not all of its activities to us," he says.
Another development in the market for fiduciary management has been the move towards ‘blended ‘ mandates, where asset managers offer a mix of internal and external asset management. This is the approach of F & C Investments which entered the fiduciary management market last month.
Paul Niven, head of asset allocation at F & C ,says the open architecture approach to fiduciary management, whereby the asset manager looks for the best in class, is too expensive. "Early entrants into the fiduciary management market place basically went down a route saying fiduciary is about best in class asset management - we will go out and find you the best asset manager in each individual category.
"It sounds the ideal scenario but it tends to be very expensive in terms of results and what a pension fund pays for them. Pension funds will have a certain amount that they want to spend in terms of asset management and frankly they don't care whether its from F & C or someone else - they're just interested in performance. Our view is that a blend of internal and external products is appropriate."
The blended approach , however, poses questions about objectivity, says Niven. "The attraction of the purely internal approach or purely external approach is that it's very clear what you're getting and there's no issue about objectivity and conflicts of interest - you know what you're getting
"With the blended approach, the challenge is creating a conflict-free solution, and we have developed a proprietary portfolio construction process to create an optimal conflict free approach to blending internal and external providers."
Yet whichever way the cards are thrown into the air, how they fall is all that matters, Niven says. "The big challenge is ultimately the delivery of performance. Our view is that a blended mix is optimal and demonstrating that we do have an objective approach to this. Some clients have strong views or otherwise on that, and getting that over may be a hurdle."
With so many permutations of fiduciary management, asset managers face a challenge, differentiating themselves from the competition, says Niven. "Differentiating yourself in a market like this is difficult unless you choose to take an extreme position and there is only one extreme position that you can take and that is best-in-class. Unfortunately we think that's sub-optimal." Niven sees a late mover advantage here. "The number of clients moving into fiduciary will pose a challenge for smaller organisations to be able to cope with all these very labour intensive relationships. So you need an infrastructure to deal with operational issues and client servicing
"The second wave are the more established players that have the more established infrastructure. They're now taking on the innovations or the changes made by the early movers into fiduciary space.
In time, the second wave of asset managers offering fiduciary management could even pick up business from the first wave, as pension funds switch fiduciary management mandates from one asset manager to another. "We do expect there will be a number of mandates as we see the first turnover of fiduciary clients," says Niven.