Is conflict of interest an issue in the provision of multi-manager (MM) solutions for the pension fund investor? MM providers with links to consultants are not hard to find in the increasingly incestuous world of institutional investment services.
“It’s certainly gone through our mind that there are potential conflicts. Trustees should be aware of that when they appoint. It is not very comfortable for the industry if those conflicts are swept under the carpet”, says Glyn Owen, head of multi-managers at RMB International (RMBI).
RMB, wholly owned by South Africa’s First Rand group, has been offering institutional MM products in the UK for two years. Long only building blocks are offered through a Luxembourg SICAV as well as a range of hedge FoFs. South Africa has been a major source of institutional MM activity in Europe, the best known case in point being Alexander Forbes, which dominates the South African institutional market along with its MM subsidiary Investment Solutions. In the UK, consultant Lane Clark Peacock, also part of the Alexander Forbes Group, has links with Investment Solutions.
As Owen points out, multi-manager arrangements are a natural development for consultants. “Consultancy is a low margin, non-scaleable business but you need good managers and research activities. This points to an obvious opportunity – it makes sense to offer a multi-manager product.” It is certainly the case that multi-manager operations allied to or launched by consultancies abound.
A number of MM practitioners view the conflict of interest debate as irrelevant. “It is naïve to point to this as an area of conflict. There are lots of situations where companies provide multiple products”, says Scott Donald, director of marketing and product development at Russell. Another argument voiced by more than one practitioner is that the buyer is quite competent to decide whether there is a damaging conflict or not. “None of the clients we deal with are anything other than diligent and capable professionals. If the situation is transparent they are perfectly capable of making a judgement,” adds Donald.
Russell appoints companies to segregated mandates. It is buying the best skills in the asset class – not something pre-packaged. “There are no managers in there that Russell has associations with. We choose completely independently from the widest range available worldwide,” he says.
Andrew Drake is chief operating officer at PSolve Asset Solutions, the MM division of consultants Punter Southall, itself part of Sanlam Financial Services. He feels that clients have a right to be concerned, and are well capable of making a decision provided there is transparency in what is being offered. “Transparency is essential – though not everyone offers it if they are not forced to,” he adds. For Drake, a link between consultant and provider may be no bad thing. “If it presents a sensible solution, that may be far more important than the fact that both providers are owned by one company”.
The advisory services which were formerly the exclusive territory of consultants are becoming fragmented into different levels of service, often separated by blurred lines. In this environment there is a gradual move from consultant to multi-manager, and different companies have coped with this evolution in different ways.
At one extreme SEI, once America’s largest consultancy business, shed its consultancy arm a decade ago to concentrate on manager of manager solutions (the firm prefers this title to that of multi-manager which, says Andrew Slater, director of institutional strategy, “can mean anything”). SEI had a “conviction that manager of managers was a better solution for clients than consultancy and it didn’t make business sense to be both”.
SEI is not a fund of funds manager: like Russell it operates its own funds within which its chosen investment specialists each manages a segregated account in SEI’s name. This makes for simplicity of structure, compression of charges and a direct line of reporting from SEI to the client, in contrast to what Slater calls “implemented consulting”, where the MM provider chooses the investment specialists, who are contracted directly to the pension fund.
Though it does not have co-ownership links with consultants, SEI, like a number of other firms, does have preferred provider status with some. Andrew Slater does not see this as posing a conflict. None of the consultants “positions SEI as the only route for its clients. They don’t hide anything – it’s all transparent”. He concedes, however, that a preferred provider link means that there is “a closer relationship with that firm than on a beauty parade basis”.
As far as the pension fund is concerned, MM has a number of attractions. PSolve’s TIGS (Total Investment Governance Solutions) service was launched just over a year ago in response to client demand. This services offers decision-making on investment objectives plus a discretionary management agreement under which PSolve implements the objectives and reports back to the client. Like an investment manager, PSolve charges a fee on funds managed, plus a performance fee. “Aligning your interest with that of clients keeps you on the straight and narrow by default,” says Drake.
As Drake points out, post-Myners those responsible for pension funds either have to be qualified to make investment decisions themselves, or must delegate the job. Clients’ lawyers like the MM route, he adds, as it gives trustees some protection. Clients themselves either don’t like the idea of giving up the decision-making, “or else they jump at it”, says Drake. In exchange for putting investment decisions into the hands of the MM provider, the client, in his view, is getting “an implemented product which can move faster, change managers easily and be more dynamic”.
Drake views PSolve’s competitors as the more innovative among the investment managers – the likes of BGI – rather than consultant rivals, though others acknowledge the role of the consultant in the overall process. “It is important for us to work with consultants. They understand the liability structure and can determine the risk structure of the fund. There is room for both in the market place,” says Owen.
Drake’s conclusion is businesslike: “It’s about putting the pieces together for the client rather than getting bogged down in conflicts of interest. You have to identify conflicts, disclose them and move on”.