Competition across the board
Asset managers across Europe agree that consultancy firms must adapt to an increasingly changing pensions industry by becoming more specialised. In addition, they anticipate that new local players may emerge.
Although in the Netherlands the big names are stable, there is trouble knocking on the door. Only Mercers, the market leader, appears ready, having made its intentions to lead very clear recently. “Mercers are definitely no 1 in the Netherlands and have been taking an increasingly high profile in the Dutch consultancy market in the past few months,” notes one asset manager. “They have been publishing lots of articles and are proving their broad capability in advising pension funds and other large institutional investors.”
And Hewitt is also being much more visible now than it was 18 months ago.
But they are facing a challenge from very small, one-man operations. “This is a notable but very surprising trend,” the asset manager adds. “There is continued growth in one-man-band consultancies taking on the large established firms in advising not just small pension funds but some of the largest.”
He says consultants such as Henk Klein Haneveld, adviser to the €13bn Philips pension fund, and Bert Huppen are the most prominent and aggressive players and believes there are several reasons for this. “Klein Haneveld is very experienced, so much so that his nickname here is ‘the man with grey hair’. Many pension funds use his broad experience to gain a second opinion. Trustees use him for validation, as it were.”
And Bert Huppen is said to be innovative and fresh with a simplified multi-manager approach that is appealing to institutions that are looking for specialist solutions that add greater value without considering first and foremost asset allocation. But not everyone is convinced by his methods. “Because of his outspoken style and attitude, you either like him or you don’t,” the asset manager notes. “But his reputation is growing.”
Another major area of discussion is why, given the way the Netherlands’ pension industry is evolving, many consultants are not expanding their services from just specific mandates to advice on the liabilities and accounting sides.
“I’m surprised we haven’t seen many consultancies going down this road, as it is practically impossible to be efficient these days if you don’t understand the liabilities side,” says one Amsterdam-based consultant. “And since there is no conflict of interest involved, it would seem the ideal way forward.”
He says there is now a greater role for consultants to play in advising trustees on the implications of liabilities and how they affect portfolios. This will create major competition among the consultancies as they clamour to help pension funds restructure their portfolios to protect against the losses they incurred during the equity market downturn a few years back. “This may scare actuaries but that is tough luck,” he adds. “The pension funds themselves can only benefit from the expanded market and greater choice will lead to more sophisticated products and solutions.”
Mercers aside, the major players do not appear to be responding to the impact the one-man operations are having. “They are very quiet given the activity of these individuals,” says one main asset manager. “They are carrying on with their classic advisory roles and going round the industry trying to understand what is changing. This is puzzling as it is more reactive than proactive.”
He adds that even in reactive mode, they are not coming forward with any fresh tactics to draw attention to their broader expertise and areas of activity.
But one of his counterparts thinks they may not be taking the newcomers seriously. “Institutions can be creatures of habit and resist large-scale change, even in developed markets,” he says. “Though they may be listening to the
individuals, ultimately their
loyalties remain with larger established houses. That is why they are seemingly not worried or ready to poach ideas.”
Overall, the feeling is the consultants could be doing more to move forward or embrace the challenges of the new pensions landscape in the Netherlands. “The big boys need to be careful,” one fund manager comments. “If they don’t react soon we may well see a few more Klein Hanevelds and Huppens flooding the market. Complacency can be a damaging trait. We already see pension funds shying away from using consultants more, which is a pity. This is creating a gap in the market.”
Germany is still in the midst of a pensions’ revolution that is opening up every aspect of its retirement provision industry, and its consultancy market is rubbing its hands in anticipation. “We find there are now many local players jockeying for position as the larger international firms, in particular Mercers, seek to make their mark,” one leading Frankfurt-based asset manager comments. He says Feri remains Germany’s leading consultancy in terms of business volume and its knowledge of how the German market is developing will mean it will continue to lead. “Feri is a pretty heterogeneous group that offers asset management as well as traditional consultancy and the new pensions funds are tempted by this combination even it sometimes implies a conflict of interest.”
One fund manager claims a key reason the larger, internationally renowned consultancy firms still have not penetrated the German market as much as they would like is their perceived lack of understanding of the culture and language. This is leading to a market where established Swiss consultancy firms are gazumping the big internationals by forging strategic relationships with their German counterparts.
“Germany is still very much a local market and is certainly some way off being as developed as the Netherlands or the UK,” says one observer. “Many consultants and their clients still need access to local networks and this means speaking German is paramount.”
He believes that until the big players tackle this, strategic partnerships are likely to grow, such as Zurich-based PPC Metrics and Wiesbaden’s Georg Seil Consulting GSC creating GSC-PPCmetrics and Complementa’s developments with FondsConsult. “These are joint ventures offering a wide range of services, including asset liability studies, strategic asset allocation, administration, performance monitoring, beauty contests and manager selection. This is very much a trend and we are keen to see what kind of market share these link-ups will eventually command.”
Although another leading German asset manager agrees that the local players Feri, RMC and Alpha still control the German market, he is unsure what kind of inroads the new partnerships will ultimately make and is more optimistic about the role the larger players will assume. “It remains to be seen how successful these new partnerships will be,” he says. “They are very young and I haven’t seen any change in the nature or level of advisory services Germany’s pension funds are demanding. I think they will only offer a more personalised service, not new products.”
He adds as the German market moves from being based predominantly on balanced mandates to specialist mandates the demand for more sophisticated investment solutions is growing, particularly as interest increases in alternative asset classes like property. Many investors rue the loss of surpluses, and this is leading many German institutional investors to move away from domestic banks to international consultancies for advice.
“The market is ready to open up,” he says. “German investors are getting high levels of service in an enlarged market. This enhancement is great news and will lead to more sophisticated products. But I doubt whether the local players will give in that easily, implying the market will become more competitive and costs will come down.”
The growth in asset managers offering advice is growing in Germany as many investors are looking more closely at their positions. “Some institutional investors are looking to unlock the secret elements of their balance sheets so they have a clearer picture of their liabilities,” says one fund manager. “Asset managers are getting involved in this as part of their strategic asset allocation advice, while consultants are still used mainly for traditional consultation such as manager selection.”
He adds that the reverse is also true as consultants realise they need to expand their range of services if they are to compete effectively with one another and their asset management counterparts. “Ultimately I’m not sure if this will develop as a major trend,” he adds. “It will more likely level off as the market evolves and asset managers and consultants alike realise where their main areas of expertise lie.”
The UK market is likely to see a big chase for market share among the consultancy firms in 2005 as they try to increase revenue from sources outside their traditional areas of activity. “We saw a massive conflict of interest among consultants in 2004 as some of the players began pushing their own products, especially defined contribution funds,” one market observer comments. “And they unashamedly tried to sell to their own clients.”
He adds that this is creating a difficult market as asset managers become wary of consultants. “The roles were clearly defined before and consultants were seen as honest brokers,” he says. “Now, however, the two professions are increasingly competing with each other and it remains to be seen if this will actually benefit pension funds in the long run.”
Watson Wyatt is seen as the clear leader in the UK, followed by Mercers and Hewitt. “There is clear water appearing now between Watsons and Mercers,” says one London-based asset manager. “It was difficult to split the top two before but Watsons had a very good 2004 in terms of innovation and new ideas, such as investing outside core assets.”
He says two of Watsons’ senior consultants, Craig Baker and Jane Welsh, are doing particularly well, adding hedge funds, portable alpha and TAA strategies to new-style balanced mandates. “This isn’t stuff that’s lingering on the drawing board,” he notes. “They are already out there talking to clients. Watsons are also leading the way in putting together more imaginative global equity portfolios for long equity mandates. They’re taking the bull by the horns.”
In the UK the gap is widening between tier-one consultants – including the ‘big three’ of Watsons, Mercers and Hewitt and Hymans Robertson – and tier-two consultants, comprising such firms as Lane Clark & Peacock, Punter Southall, P-Solve and Aon. Though observers are not sure whether this is because of more sophisticated products or costs, it is seen as a trend that will continue for some time.
“Some tier-two consultancies are offering their own branded products through their own investment platforms,” says one manager. “But they are still finding it hard to compete with the big three as they simply don’t have the same level of resources.”
But that has not stopped the tier-two players gaining market share, as another manager points out. “Some pension funds have actually fired ‘big three’ players recently as they are unhappy with the level of service they have received,” he says. “But these tend to be smaller funds. The big three have the resources to retain the high-value pension funds and may well therefore be willing to let a few smaller ones go instead of offering more bespoke services. The tier-two firms are definitely seeing the chase for smaller pension funds as they offer more customised services whilst the main players are confident they will retain the big funds who want across-the-board advice.”
Others to watch out for in the UK include HSBC Acturies and Consultants’, which is promoting ideas on the use of alternatives in long-term return mandates, and bFinance, which is taking on Hymans Robertson with its manager-search programme for local government and public funds.
In Switzerland, domestic players Complementa and PPCmetrics continue to dominate the market, and leading international groups Watsons and Mercers are regarded as still not making any real impact. “There have been plenty of personnel changes in the industry but no specific individuals or groups challenging the leaders,” says one Zurich-based asset manager.
But he says that could soon change as institutionals are beginning to question the added value of consultants. “Life was very rosy for the consultancies before the equity markets started creaking. Their influence peaked around 2000, when pension funds had to consider restructuring their active side to avoid further losses as a result of market developments.” He adds that their portfolios were already designed around consultants’ advice, so they lost some confidence in their advisers’ ability to steer them in the right direction.
“It is no longer a boom market,” says another observer. “Nonetheless, advice is still needed, and while consultants’ superiority as solution providers has been somewhat eroded, they still have a role to play.” He believes the market is open for new players to make their mark. “In some respects the Swiss market is already oversubscribed and that’s why some are looking abroad for new opportunities.
Individuals and new firms have as much chance as the established houses, provided they get the balance right.”
In Belgium, however, the established players are unlikely to see any real competition from new entrants. “Watsons, Mercer and Pragma continue to dominate,” says one fund manager in Brussels. “And they will become more popular as institutional investors, disappointed by their advisors in recent years, are sticking to the internationally established firms because they believe these have the greater expertise and resources to deliver.”
There has been the development of a joint venture between Dutch company Ackermans and Karel Stroobants, formerly of VKG/CPM, which is aiming to provide across-the-board services to pension funds.
But that is not to say the leaders in Belgium are necessarily doing a good job. As another manager explains: “Watsons, Mercers and Pragma have all been coming under some fire recently. There is definitely room in Belgium for new consultants but being a small market, very few are tempted to make the break, as the resources needed to establish one-self are pretty considerable.”
He says asset managers themselves are challenging the big three. “The asset manages are getting more involved, but not necessarily proactively. The open structure of the products they offer means there is scope for consultancy work.” Petercam is being commissioned by some pension funds to offer asset allocation advice and while it isn’t always easy to perform both roles, it is happening more and more, he adds. “Consultants are considered to be very expensive. In a time when institutionals are very conscious of their expenditure, asset managers are being seen as providing cost-effective and efficient advice. This trend is likely to continue and the consultants themselves are now looking at greater areas of specialisation.”