Investment Solutions: Spiralling into control

Mariska van der Westen surveys the Dutch fiduciary management landscape. Pension funds are requiring providers to tailor their services and regaining control of the investment chain, as yesterday’s fashions fall out of favour and old models gain popularity once more

Shortly after the turn of this century the Dutch were the first to embrace fiduciary management, the comprehensive one-stop-shop approach to asset management outsourcing that has since gained a following in the UK and elsewhere under a variety of labels, including ‘delegated CIO’ and ‘implemented consulting’. Now they seem to be the first to back off from the concept.

Approximately 56% of respondents to IPNederland’s fifth annual pension fund survey, conducted in December 2012, currently employ a fiduciary manager. The percentage of pension funds that either use or plan to start using a fiduciary manager has declined by some eight percentage points since 2011. The number of Dutch pension funds that want no part of fiduciary management has risen for the first time in five years, to more than 32.3%

It seems that the Dutch have become disenchanted with their own invention. So what has happened?

“The crisis has revealed that the fiduciary concept is not the holy grail for pension funds.

One-stop-shop outsourcing doesn’t improve a trustee board’s knowledge and expertise – and pension fund boards do need a certain level of sophistication and expertise to deal with today’s complex and challenging investment environment,” says Fons Lute, managing director of the fiduciary mandates investment team at BlackRock. “So pension funds have begun bolstering their internal expertise by installing trustee support boards and more recently by appointing professional trustees to their boards, and the market has turned away from wholesale outsourcing.”

After years of outsourcing anything from hands-on trading to strategic decision-making, Dutch pension funds are regaining control of the investment chain. They are re-internalising big chunks of what had previously been outsourced – creating what might be called the lava lamp effect.

Remember the lava lamp? Most of us have owned one at some point: a vaguely futuristic-looking glass cone filled with a clear liquid, with a brightly coloured waxy blob sitting at the bottom. When switched on, the lamp heats up and the blob starts birthing globules that rise until, upon reaching the surface, they’d break apart and sink back to the bottom.
The two Dutch industry-wide metal workers schemes have followed a similiar trajectory.

Both the metal and technical workers scheme PMT – which with AUM of €48.9bn is the bigger – and PME, its €32.7bn sister scheme for metal and electrical workers, trace their roots back to 1947. When the Dutch lava lamp began heating up around the turn of this century, PMT was among the first to spin off its pensions and asset management division, creating one of the first fiduciary managers: MN (MN being the acronym for metal industry in Dutch). In 2007, PME outsourced its asset management to MN, swelling the manager’s AUM to some €60bn, with MN absorbing the scheme’s internal asset management staff.  

Two years and one crisis later, a turning point was reached. The Dutch pensions regulator and supervisor, the DNB, which until then had supported outsourcing and encouraged pension funds to spin off asset management divisions, expressed concerns that trustee boards had delegated too much control to their fiduciary managers. The supervisor came down especially hard on PME, issuing a formal admonition and ordering the scheme in December 2009 to improve its control of investment and outsourcing risks. During an investigation at PME and MN, the DNB discovered that an adequate management framework was absent, and that PME’s balance was in a “worrying state”.

After that, nearly half of PME’s trustee board resigned and the scheme once again installed an internal asset management department independent of its fiduciary manager.

The lava lamp effect is not limited to pension fund-owned managers. The same phenomenon can be seen ‘across the aisle’ where commercial asset managers are just as prone to behaving like brightly coloured waxy blobs when heated.

“We are seeing an unbundling of services – and in line with that, an unbundling of fiduciary fees,” as BlackRock’s Lute puts it.  As pension scheme boards burned by investment losses and spurred by a newly vigilant regulator seek to (re)establish control of the investment chain, the larger fiduciary managers have responded by erecting Chinese walls between asset management, risk monitoring and advisory functions, either by virtually cordoning off capabilities or by offering modular services, or both.

And the cycle continues. Even as fiduciary managers are moving towards segmentation and a modular approach, first-line asset managers are expanding their capabilities to resemble a fiduciary management-type approach. After all, if the crisis brought home one point, it is that everything is connected. In facing this new reality, even managers without any fiduciary or multi-management ambitions are moved to develop comprehensive solutions, combining straightforward asset management with some form of risk management and strategic advice.

“Between 2007 and 2008 everything changed. The demand for broader insights and a top-down approach increased because it provides clients with a better idea of where they could safely invest and where the risks are,” PIMCO’s Lonond-based managing director Joe McDevitt told our sister publication IPNederland last year.

“It’s all good and fine for us to offer some great equity or fixed income product, but it isn’t the building blocks that count. What counts is how they fit together and how the sum of the parts matches the needs and risk appetite of the pension fund as a whole,” added Wylie Tollette of Franklin Templeton.

For the past five years – ever since Lehman’s demise – there’s been a lot of heat, generating a lot of motion. On a fundamental level, it may seem like nothing much changes. People, and sometimes entire teams, transfer from one organisation to another, and back again, and round and round. Responsibilities are shifted from one organisation to the next, then reabsorbed into the first, possibly to be spun off in a slightly different form.

Does this mean there is no real evolution? Not at all: Like climbing a spiral staircase, each revolution is part of the evolution.

Dutch pension funds have done the ‘bigger is better’ thing, and they have done the ‘outsource the lot’ thing; now they are embarking on the ‘oh, wait a second, maybe not quite everything’ leg of the journey. They are taking back responsibility, regaining control of the governance chain of asset management, reclaiming command. They are spiralling into control.

And as they do, new opportunities arise. The Dutch fiduciary market is saturated and doesn’t offer much additional growth. Over the past few years new mandates of any size have been few and far between: in May of 2011 supermarket chain Ahold awarded a €2.1bn mandate to AXA Investment Managers and last January the Dutch automobile association ANWB granted a €1.4bn fiduciary mandate to ING IM, but most other mandates concern existing fiduciary clients changing provider, rather than new business.

The trend of unbundling, however, opens up new possibilities – at least for some providers. “Pension fund spin-offs will find it difficult to compete in this new environment.
But it creates opportunities for ‘market literate’ players: large, sophisticated asset managers that combine a wide range of expertise and solid risk management systems with hands-on investment experience,” according to Lute.

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