Fiduciary management moves into a new phase
Miranda Schoutsen spoke to five providers about changes in fiduciary services, re-orientation and a changing of the guards
One pension fund after another opted for fiduciary management until about the beginning of 2007, but since then, and because of the credit crisis, there have scarcely been any mandate awards. "Pension funds were right to put this on hold, and not merely because all of the difficult questions that DNB has been asking," says Philip Jan Looijen of Mn Services. "We too have taken the time to consider the credit crisis and its consequences for our business."
This was not just the case for Mn Services: pension funds entered a completely new world, and so providers have adapted their services accordingly. Funds have been in need of a fiduciary manager that stands closer to them. In addition, the fiduciary concept itself has been refined. "Better balance sheet and risk management," as van Looijen summarises the most important accentual changes. "And of course more attention is being paid to transparency and the sustainable investments, as well as accountability and whether investments can be explained."
Transparency is a recurring theme when it comes to the effect of the credit crisis on investment policy. "And simplicity, in the sense that pension funds are less inclined to choose a portfolio with a lot of alternative and illiquid investments. The board just wants to have a really good understanding of what's going on," says Maarten Roest of Kempen.
Peter in de Rijp of SEI also sees, along with other providers, an above average level of attention paid to risk management. "This is actually almost an open door following a crisis of this extent." But he also points to specific problems that some pension funds have had with LDI solutions. "Pension funds thought they were investing in risk-free paper, or that they had investments oriented towards the hedging of interest rate risks. They have had to make substantial write-offs on collateral. This would suggest that it wasn't just transparency that was sub-optimal, but risk management as well."
This is the reason why Goldman Sachs Asset Management, according to Pepijn Heins, has made considerable efforts to develop new risk management techniques. "Pension funds need a partner in this sort of crisis who is creative and does not push off-the-rack solutions."
"This crisis has shown that risk budgets have to be dynamic," adds André van den Heuvel of BlackRock. "We have implemented this approach for our clients during the crisis and have advised pension funds to adjust their strategy."
However, during the crisis some pension funds felt helplessly at the mercy of not just the financial markets, but also their fiduciary manager. Looijen: "For this reason we have spent a lot of attention on communicating what was going on and what this meant for the portfolio. We immediately invited all clients to our office. Because one can easily imagine how a pension fund director might feel somewhat abandoned and left to his own devices when having to explain the situation to the sponsoring company."
Despite this, not all fiduciary managers have succeeded in easing their clients' concerns. "I'm getting signals left and right that some pension funds are rather disappointed in their fiduciary manager's level of pro-activity," says In de Rijp of SEI. And van den Heuvel of BlackRock also has the impression that a number of pension funds is quite unhappy."We have been called frequently recently by pension funds enquiring about our approach to fiduciary management. That is a sign for me that something is amiss. You don't spend a few hours on that if you're totally happy."
Of course, the crisis has eaten away large chunks of pension fund assets. But according to Van den Heuvel, pension funds are not just dissatisfied about performance or risk management, but also about service and communication. "If the client has already hit the phone then you're too late. When a crisis like this unfolds you have the obligation to inform the board well: listen, the chance of achieving your objective in this way is now very slim, let's look together at how we can change the policy."
Market stirs to life
As much as fiduciary management has led to disappointment for some pension funds, there is still a need for integrated total solutions. Now that recovery plans have been submitted, In de Rijp is starting to see more strategic discussions about how investment processes can be improved. "Because of this we expect that a number of pension funds in the second half of the year will decide to switch to fiduciary management."
Looijen also sees signs that many pension funds have entered a period of reflection. "Even pension funds that have got off relatively unscathed still have had to deal with questions regarding issues such as securities lending and counterparty risk with derivative transactions. Some board members have come away with the sense that they don't have a good level of insight into the more complex asset management questions."
And so the market for new fiduciary management mandates is stirring back to life. In June, Mn Services was awarded a mandate from the Campagne pension fund. "A great mandate at a great moment," says Looijen. "We have a good pipeline, certainly if compared with the same period in 2008."
SEI also sees an increase in the number of new searches. "If you go public with a search then you have already decided that fiduciary management is a good solution," says In de Rijp. "These are not merely the very small pension funds, either. There is a search in the €10bn-plus arena and certainly two smaller ones of €300-500m."
Kempen has continued winning new clients without any sign of a dip, even during the crisis. "This has led to five new mandates in the past six months, among them the pension funds of Boskalis and ZLTO."
Parties with a fiduciary manager were clearly in better control at the time of the credit crisis, he contends. "Parties without external support may well have wondered more often than others: ‘what is going on and how should I react?'"
It's not just the effects of the credit crisis that have led to reflection and evaluation. "We are now seven years on since the first mandate was awarded," says Heins. "Of course it's logical that clients will re-evaluate their relationship with their fiduciary manager after such a period."
The Vopak pension fund was the first to change its fiduciary management provider following an evaluation process, and Mn Services was replaced with BlackRock. "Vopak was our very first client," recalls Looijen. "Our fiduciary model has evolved in the course of time and now we only select mandates where the whole investment portfolio is outsourced.
"This was not the case with Vopak, and we grew apart from one another. The re-evaluation began in 2007, well before the crisis. We did take part in the pitch but with our current fiduciary management proposition."
Van den Heuvel confirms that account, and believes that Vopak chose BlackRock because of the flexibility of its model, which leaves plenty of space for individual input. "Vopak has a very experienced investment committee with a strong opinion and you have to listen well to them."
Van den Heuvel sees that the fiduciary management concept has been subject to change for some time now. The emphasis no longer lies on manager selection but much more on strategic advice, portfolio construction and risk management. "The first two determine around 90% of the fund's return."
BlackRock's focus has also altered over time. "At the start we left smaller pension funds out of consideration because of cost considerations," says Van den Heuvel. The firm remains selective in its client acquisition. "We do sometimes deliberately choose not to take part in a search, when a lot of emphasis is placed on manager selection, for example, because we can do a lot internally." Van den Heuvel sees strong similarities among his firm's clients. "They have a strong investment committee that values dialogue and often they have a technical background or highly educated people. Although this does not mean that we will not take pension funds by the hand."
Now that the market has grown to some 25 providers, the time is ripe for segmentation, believes Heins. He says that his team sometimes has a better fit with pension funds: "We are a specialist and can offer the best expertise from our global organisation." But he also realises that GSAM is not included in every search. "If we are talking about standard solutions there are providers that are cheaper than we are. But we always take time to explain what clients can expect from us. And we do everything we can to understand the expectations of the pension fund."
Looijen emphasises that much depends on the chemistry between pension fund and fiduciary manager. "This is obvious when we work with corporate pension funds. Mn Services comes from a market environment and is familiar with this culture. That is not the case if you are used to speaking to the ministry of social affairs."
Roest believes that pension funds will increasingly demand tailor-made services and that specialist parties will be the best equipped. "Pension funds want to retain their own identity and find a solution that fits well." Roest does not see a problem with this placing large demands on the people and resources of a small provider like Kempen.
"Fiduciary management in any case means considerable co-operation with outside parties like ALM consultants and asset managers." He does believe that the number of providers, at 25 currently, is unsustainable: "A number of parties will withdraw," he predicts.
Heins believes that the increase in competition over time is positive. "And since the arrival of APG and PGGM the situation has only improved. This does not just lead to more options for pension funds but also to more creativity on the part of the providers." Looijen also believes the arrival of two large new competitors to be an interesting development. "I am curious to see what type of parties they will focus on. When we started, many potential clients were concerned about how they might retain their identity next to our one giant pension fund client, PMT. That appears to be a particular challenge for APG."