Controlling your investment and other costs
Low management fees are not necessarily the best management fees, believe senior managers at some of Europe’s top pension funds. Addressing pension market professionals at the second seminar at the IPE Awards, the panel of five gave their opinions on how to control investment and other costs.
The panel comprised Peter Murray, chief executive officer at UK pension fund Railpen; Christoph Schenk, chief investment officer at Swiss-based ABB Vorsorge; Michael Atzwanger, general manager at Italian pension fund Centrum Pensplan; Fabian de Bilderling, senior investment officer at Belgium’s Belgacom; and Thomas Bergenroth, senior vice president and managing director of State Street in Munich.
Explained Murray: “Fees vary so much depending on type of mandate, size and domicile of manager. We do not believe that lowest fees are best, except perhaps on large passive mandates. There are a lot of good index managers out there, and not much between them.”
Schenk agreed that low fees are not best, suggesting that managers can instead adjust prices to compensate for low fees.
The subject of performance fees was also given an airing at the seminar. Schenk regards performance fees as potentially damaging to pension funds. “An active manager can increase risk to increase performance, but it is the pension funds that will see the downside, not the asset manager.”
Outsourcing management purely as a cost-control tool was dismissed by all five panellists.
“Outsourcing can cause more problems, rather than get rid of them if management is not careful. Pension funds must understand their own mechanisms, they must know what they want to achieve before outsourcing. Outsourcing can add benefit to a pension fund, but it is not a solution provider, “ warned Schenk of ABB – a large outsourcer.
Atzwanger agreed that outsourcing can be an effective tool in cost control, but only in a competitive environment.
For Belgacom, all management is outsourced as it is more cost effective. “The fund is only e3.1bn in size – just not big enough to warrant running the fund in-house,” said de Bilderling.
Advice was also offered on how to run a fund more efficiently.
“One of the biggest traps managers fall into is loving everything new,” said Schenk. Managers often get excited by new strategies without thinking them through thoroughly, believes Schenk. “You should ask yourself ‘just what is the contribution to my beneficiaries, to my asset allocation?’, and often the answer will be, nothing.” For example, a strategy that will lead to higher returns will seem attractive at first glance. But if it involves more risk, then volatility reserves will have to be increased and ultimately beneficiaries may then receive less.
De Bilderling advised pension funds: “look for comfort, but balanced mandates although comfortable are not always efficient. Often you may be paying active management fees for a near passive portfolio. Also avoid too many managers, as this is not cost efficient.”
Murray believes that efficiency will come from maintaining the right balance between risk and reward, and spending the risk budget wisely. Atzwanger believes that a manager should know every stock and bond in the portfolio.
Closing the seminar, the panel broached the provision of commercial services by pension funds – unanimously agreeing that opportunities in this area were growing.
“If providing other services strengthens the role of the pension fund, it is important,” said Atzwanger.
Schenk agreed the importance, saying that pension funds should not rely solely on the plan sponsor but offer its services to other sectors.