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On the Record: How do you get the best out of consultants?

BNL BNP Paribas
Italy
Romano Leligdowicz, Head of asset management 

• Location: Rome
• Assets: €1.2bn
• Members: 15,900
• Pension fund for employees of BNL BNP Paribas 

As the pension scheme for employees of a banking group, we have staff with significant experience in finance. Over the years we have built a dedicated investment management team within the scheme. However, we do work with an investment consultancy, which gives our board an independent view of our decisions. 

Our consultant helps us with the definition of the asset allocation strategy, and supports our risk management process. The internal investment management team, with support from the sponsor, oversees and manages the main investment activity. This includes the strategic and tactical asset allocation, risk management and manager selection. 

However, our consultant provides additional support. Our investment activity is planned and implemented by us in close collaboration with the consultant. For instance, when it comes to manager selection, our consultant analyses all the responses coming from prospective asset managers. But we do the analysis work internally as well, and we compile the shortlist in collaboration with the consultant, before presenting it to the board. The whole process is certified according to international standards. This means we have to meet quality and transparency standards and avoid conflicts of interest. 

At the end of 2015 we ran a search for an investment consultant, as the existing contract was ending. Five firms participated in the tender process, and the existing consultant was reappointed. 

It would be positive to see more consulting firms participate in tender processes, including foreign ones. However, it would be more challenging for foreign consultancies, as the communication process is more cumbersome. Foreign firms with a presence in Italy often carry out the investment advice and risk management work outside the country. This means that the speed and effectiveness of communication is limited. That would not be ideal for us, as we often need real-time feedback from our consultants, particularly when we are making tactical allocation changes. In the case of foreign firms, it can also be difficult to identify who is responsible for the advice. 

Another area of investment advice that is becoming more popular is the construction of environmental, social and governance (ESG) portfolios. We are at the final stages of a project to redefine our investment universe for equities and corporate bonds according to international ESG standards. It is a challenging but exciting project that requires specialised advice.

Heidelberg Cement
Germany
Marc Boone, Global head of pension AM

• Location: Heidelberg
• Assets: €4.6bn
• Members: Over 80,000
• Type of fund: defined benefit/defined contribution (multiple locations)

We use investment consultants in nearly all of our jurisdictions. In some, there is a legal requirement to use suitably qualified persons, which tends to translate to consultants. In other locations the use of a consultant is considered a good practice vis à vis fiduciary responsibilities. We use consultants in varying degrees for all the traditional roles, including strategic asset allocation, asset-liability management studies and manager selection. We tend to have long-term relationships with our consultants, though we do periodically review and occasionally replace them.

We don’t blindly follow the advice on offer. It sometimes surprises consultants when we thank them for the advice they have given, even when it is solicited, and then either stick with what we already have or move the conversation in another direction. We’ve also rejected unsolicited advice that looks like it is the ‘topic de jour’. My favourite example was a push to get a particular group of trustees to take training on how to be speedier in making decisions. We replaced that consultant shortly after that conversation. Some of the unsolicited advice offered to us might genuinely add value, but most of it certainly generates unplanned expenses, so I tend to take a dim view of it without some discussion up front as to whether or not we would actually be interested in hearing it, much less paying for it.

The investment advice market is regulated to varying degrees in the several jurisdictions in which we operate, but that provides little to no protection or endorsement of the quality of the advice ultimately given. It is still very much caveat emptor [buyer beware].

There isn’t enough competition between consultants in some of the jurisdictions we operate. That has been borne out in a number of studies. The UK’s Financial Conduct Authority recently noted that the top-three firms have about 60% of the UK market. This is largely a product of market participants’ herding tendency. There is little upside for most trustee or management teams to wander very far from the top firms, largely on the principle of safety-in-numbers. The best way to engage in a successful relationship with a consultancy is to be clear not only on the objectives and constraints but also on the role of the consultant. It seems people forget that, aside from potentially being fired, consultants rarely bear the responsibility for the failure of their advice. When that is taken into account, there is less willingness to simply follow advice until the relationship blows up for one reason or another.

Istituto di Previdenza del Cantone Ticino
Switzerland
Pierre Spocci, director

• Location: Bellinzona
• Assets: CHF4.5bn (€4.2bn)
• Members: 23,338
• Pension fund for the public employees of the Ticino canton

We have a long-term relationship with our investment adviser, who oversees many aspects of our investment activity. The firm supports us in our asset-liability management studies, which are run every three years, and designs the strategic asset allocation based on such studies. The consultant also oversees the selection of managers. They also propose tactical changes to the portfolio. Any change to the portfolio has to be approved by the board.

The investment consultant has a long-term mandate with clearly defined contractual terms. The terms of the mandate, however, are not linked to the investment performance of the pension fund. The consultant is paid on a project basis. 

In 2015, the firm helped us rebalance the portfolio. We cut the share of domestic investments and increased the allocation to foreign equities and corporate fixed income. We also implemented a currency hedging overlay for our equity portfolio. The purpose of this was to find higher returns, without raising portfolio risk excessively. Diversifying the portfolio outside our domestic market should help us achieve that. 

Our investment adviser proposed the change in asset allocation and oversaw the selection of investment funds, through which we implemented the new allocation. We have limited internal capacity to monitor our managers and funds, therefore a great deal of responsibility is placed on our adviser. 

The adviser focuses much more on the design of the strategy than on the selection of managers or funds. They believe that building the correct strategy is more important than selecting the right manager to achieve success. 

Our choice of investment approach partly reflects this principle. Over the years we have divested from our active managers as we were unimpressed by the results. Now we invest mainly through passive funds, which gives stability to the portfolio. 

A different, dedicated consultant supports us in our real estate investment activities. We have an internal team that managers our direct and indirect property investments. However, we use the firm to help us with the evaluation of investments. 

Interviews conducted by Carlo Svaluto Moreolo

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