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Pension schemes overpaying for alternatives, experts say

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EUROPE - Pension funds often pay too much for asset managers, particularly when it comes to alternative investments, industry experts have warned.

Speaking at the German pension fund association's (AbA) annual conference, Ueli Mettler - partner at Swiss consultancy c-alm, which the Swiss social ministry (BSV) commissioned to look into asset management costs in the second pillar - said: "Costs explain around one-fifth of difference in performance."

Invited as a guest speaker to the conference, Mettler presented details of the study and told delegates that c-alm had found "a definite correlation between higher costs and lower net return".

The consultancy identified alternatives as the main culprits, as they only made up around 7% of investments but 37.2% of costs, Mettler noted, updating preliminary figures issued by the BSV earlier this year.

Mettler also spoke out against further regulatory investment restrictions for Pensionskassen.

Investment decisions should reside with the trustee board, he said, as "these people are also responsible for the fund's performance".

However, he noted that regulators had the means to increase transparency of products and investments, as investors had "paid dearly" for "asymmetries in information" between them and the asset manager.

Mettler said funds should use the effects of scale by pooling mandates rather than over-diversifying, as this, together with re-negotiating mandates, could save as much as one-quarter in costs.

He added that performance fees were basically "options" emitted by the institutional investor and should be valued accordingly.

Also speaking at the conference, Paul Woolley - former chairman of GMO Woolley until 2006, after which he funded the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at the London School of Economics - largely agreed, saying that charges and fees were one element responsible for low returns in recent years.

"The main return of hedge funds went to their owners, not their clients, who were lucky to get anything," Woolley said.

Respecting private equity investments, he said "hidden costs" and commodity investments were "unethical".

Quoting from his 'Manifesto for Giant Funds', he slammed alternative investments and performance fees and urged institutional investors to transform their way of thinking.

"Performance fees just aggravate moral hazard, and if they are applied, then it should only be over a 3-5 year investment horizon," he said.

Similarly, he said mark-to-market valuation was "cyclical and damaging" because it "forces short-term views on investors who should be investing long".

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