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Britannic AM opposes unconstrained benchmarks

UK – Frequent changes of pension fund benchmarks should be avoided, says Britannic Asset Management, in response to recent advice from consultants to use “unconstrained benchmarks” to avoid index-hugging.

UK consultants are pushing for pension funds to “free-up” managers by moving away from traditional benchmarks, which they say are preventing managers from doing their jobs properly. They say they force managers to hold stocks which they would not necessarily choose in order to avoid deviating from an index.

Consultant Hewitt Bacon & Woodrow recently announced a new idea of “unconstrained benchmarks” whereby trustees instead hand over decision-making to the managers, and let them pick the best stock regardless of country, sector and index weighting.

Consultants’ opinions on performance targets have changed frequently over the last twenty years. Says Britannic: “During the 1980s, peer group benchmarks were much favoured by investment consultants. By the end of the 1990s, the trend had moved towards index benchmarking. Now in the 21st century unconstrained benchmarks and absolute returns are being proposed.”

“Instead of constant change, we would welcome the opportunity for investment managers to work more closely with investment consultants and pension scheme trustees when it comes to setting benchmarks, performance targets and risk parameters, to ensure they get them right,” says Britannic Asset Management’s director Francis Ghiloni.

“If pension schemes want their managers to add more value, a change of targets and risk parameters may be all that’s needed to address the issue, rather than wholesale frequent change of benchmarks,” adds Ghiloni.

Furthermore, unconstrained benchmarks are regarded by some as essentially “passing the buck” to managers. Britannic is suggesting that, in order to overcome benchmark hugging, what is needed is a good look at performance targets and risk parameters.

This can be achieved only through close communication with consultants, managers and trustees. It is, after all, the advisers themselves that determine mandates or performance targets - not the managers.

Britannic AM has around 7.7 billion euros in European pension assets under management and 22.1 billion euros in total worldwide assets under management.

The National Association of Pension Funds also voiced its concern. “Trustees cannot dodge the bullet. It is their duty to make the decisions and there is plenty of advice they can receive to help them,” said a spokesman at the association.

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