Hewitt sees take-up of unconstrained benchmarks

UK – Hewitt bacon & Woodrow says six of its pension fund clients have so far adopted the so-called ‘unconstrained benchmark’ approach – with more evaluating such a move.

“So far, six Hewitt Bacon & Woodrow clients, with pension funds totalling over five billion pounds (7.5 billion euros), have given a portion of their assets to fund managers for investing in equities without traditional benchmark constraints,” the Hewitt Associates arm said.

It added that “many more” clients were at “various stages of evaluating a move in this direction”. It did not name any of the funds.

Hewitt floated the idea of ‘unconstrained benchmarks’ about a year ago, and proposed that pension fund trustees hand decision-making to asset managers to let them pick the best stock regardless of country, sector and index weighting.

“In 2003 we highlighted that by trying to manage the assets tightly against benchmarks, fund managers are playing around the edges and missing the bigger picture,” said Kerrin Rosenberg, investment consultant at Hewitt Bacon & Woodrow.

“They are not helping manage the risks that matter to clients, and are also not putting their best ideas into portfolios.

“After talking to clients and pension funds, what we have seen is a pleasing acknowledgement that the current investment process is fundamentally flawed and that the terms of reference given to fund managers need to change.

“Our clients want their fund managers to have the ability to back their investment judgement.”

Hewitt said that while some clients have sought to work with incumbent fund managers, others have initiated manager searches to find new managers for the mandates.

Rosenberg said Hewitt now has lists of recommended fund managers for unconstrained equity mandates. “In general these are not organisations that we find being appointed for traditional mandates, although there are a few exceptions.

“Most fund managers welcome the opportunity for a genuine test of their judgement although some, perhaps inevitably, seem better equipped for this than others at this stage.”