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Impact Investing

IPE special report May 2018

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Liam Kennedy spoke to senior figures from Hewitt, Mercer and Watson Wyatt about the new partnership-based relationships that they are forging with their clients

John Belgrove, principal consultant, Hewitt

In common with some competitors, Hewitt has suffered high-profile departures in recent months and years from its London office. Kerrin Rosenberg, a veteran of 15 years, left last year to become UK CEO of Cardano while Sally Bridgland, who spent 20 years at Hewitt, left to become CEO of BP Pension Trustees Ltd.

But, according to John Belgrove, Hewitt's investment division is now a "turn-around story".

Some of the high-profile departures have not been directly replaced, but instead the investment consulting operation, headed in the UK by Andy Tunningley, has secured resources to pay for a new generation of specialists.

"The departure of some of the traditional consulting staff has allowed us not to replace them directly but to bring in more specialists and to reorganise us in line with the market, having core-specialist advice rather than personality-led advice," says Belgrove. "Asset consulting has become central to the growth of the business. We have strong backing from Russ Fradin, our CEO."

Hewitt has seen strongest growth in the last few years in what it calls directive consulting. Alongside that sits implemented consulting, which Hewitt calls delegated consulting. Here the service is for Hewitt to take the place of the investment committee, taking decisions and reporting back on them to the trustees.

Where are the lines of demarcation drawn? "We offer this both as a segregated approach with customisation and are at the very advanced stages of developing a pooled solution for this as well," explains Belgrove. "This is designed to be a more efficient mechanism for the delivery of best ideas."

Hewitt's pooled fund offering will revolve around two poles - liability matching funds and a diversified, return generating fund, both on a multi-manager basis, implementing Hewitt's best advice and ideas. "We are at a fairly advanced stage but have not yet launched the specific vehicles," says Belgrove.

Andrew Kirton, worldwide partner and European head of investment consulting at Mercer

Mercer started work on its well-trailed move into multi-management some four years ago with the appointment of Brian Storms from UBS Global Asset Management to develop the investment platform that Mercer already had in Australia.

That move raised concerns about potential conflicts of interest when a consultant becomes a provider. But since then the boundaries between advice provision seem to have become more fluid. Mercer's competitors have embraced implemented solutions and pooled multi-manager funds, and asset managers have entered the implemented solutions space in markets such as the Netherlands under the fiduciary management guise.

Since its launch in 2006, Mercer's multi-manager unit has dropped the Mercer Global Investments tag and goes about its business as Mercer Investment Management (IM). "The way we are increasingly positioning these businesses is as two different ways of accessing Mercer's intellectual capital," says Kirton.

Last autumn Kirton hired Michael Kinney to run Mercer's implemented consultant services. He works closely with head of research Andy Barber, head of consulting policy Nick Sykes and CIO of IM Hooman Kaveh, Kirton says. "That is a powerful group and it is more powerful as a group because the two sides are working together."

A broadening investment universe and changing client demand place pressures and costs on investment consultants. How is Mercer dealing with this? "Over the last 18 months to two years we have re-orientated the research process away from traditional asset classes towards alternatives and innovative ways of approaching mainstream asset classes," says Kirton. "We feel that we have taken a large step forward but there is more to do and I think we will see more resource being applied over the next couple of years."

Kirton also points out that there is a steadily increasing number of diversified growth or multi-strategy funds on the market, which differ enormously in what they invest in and the way they approach investing.

Do diversified growth funds cannibalise investment consulting business? "In theory yes," says Kirton. "But there is a big question out there as to how the market is going to evolve in terms of what we would call assembly. Part of our work is helping them assemble portfolios of different mandates to implement the investment arrangements that they want to implement.

"There are some managers, like Fidelity, Schroder and BlackRock, that have a team that uses products of other managers to build portfolios. And that is putting them in competition with consultants and it is stretching the limits of the consulting model. Should we research them? Should they allow us to research them? I'm not sure I know the answers but what I do know is that we are turning into a market where the relationships between different suppliers simultaneously become compete and co-operate relationships."

Roger Urwin, global head of investment consulting, Watson Wyatt

Rogert Urwin is known in the investment community for articulating his thinking on where pension funds are and where they should be when it comes to investment. And he has recently been particularly vocal on pension fund governance, where he says funds in the UK are behind the continental peers in best practice. In Watson Wyatt's recent Global Best Practice study, he recalls, all of the globally significant funds they looked at had executive teams, in which the key role is the CIO.

But in reality, of course, most UK pension funds are not going to appoint a CIO, and many Dutch funds with a CIO are moving to a fiduciary outsourcing model rather than competing for in-house investment talent. "I think that funds have actually got to the point where they feel that they have to search for a new solution providers," comments Urwin. "LDI-plus thinking has permeated thinking. Pension-plus investment is now about effective LDI, cheap beta, reliable alpha. That is a solution, and any organisation might be able to deliver that mix."

The point about this new world of solutions, Urwin suggests, is that they work well because the client is able to set the parameters of that solution. "There is a partnering taking place and here some of the differentiation takes place," he says.

Watson Wyatt's implemented consulting solution is known as advanced investment solutions (AIS). But how does Urwin see the difference between this and Dutch-style fiduciary management? Indeed, is there a difference? "At the primary level, looking at our offering in AIS versus the specialist fiduciary managers in the Dutch market versus the asset managers, I think they are very much the same," explains Urwin. "But at the next level of the fiduciary overlay, and we have some difficulties describing it, the big differentiation for Watson Wyatt is we really do want to work in partnership with clients in designing and engaging them in decision making so the client does not feel that they are working away from the responsibility. I feel that that is the biggest differentiator although not everyone agrees with me."

Urwin's colleagues say he likes to use the phrase ‘co-opetition' to describe the way Watson Wyatt must see its relationship with the outside world. But what does he think of his firm's offering compared with that of the competition? "I see the market as having natural preferences for degrees of specialisation, which is the function of a mature market. These specialisations make sense. Our offering remains to me a collection of quite specialised deep competency approaches to parts of the problem and also an ability to put together the real deal in one place. Competition comes from new sources to the ones we had before. Obviously we have our usual suspects in the consulting field but we also have our unusual suspects."

 

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