Asset managers hold the key to ensuring pension schemes get value for money from the market, according to Chris Hitchen, chief executive at RPMI, although other panellists at the PLSA investment conference in Edinburgh said all agents – including trustees – had a role to play.
The headline theme for the panel was the Financial Conduct Authority’s asset management market study, which the FCA launched in November last year, and whether the market was working for pension schemes.
Tracey McDermott, interim chief executive at the FCA, said asset management was “one of the UK’s success stories”.
But she said there was “no room for complacency” and that, as new regulations drove more consumers to engage with asset managers, it was of “enormous consequence that they receive maximum bang for their buck”.
The market study is “a serious and wide-ranging exercise”, she said.
The FCA’s next steps include a survey of institutional investors to get a picture of how purchasers of asset management services view the market, and “a comprehensive programme” of international comparison work, McDermott told delegates.
Her overview set the scene for a panel discussion during which market participants passed around to different players the responsibility for ensuring that end investors get value for money.
RPMI’s Hitchen said transparency was helpful but that it was not enough.
He said asset managers were “the part of the investment chain that we are looking to to really help us get the best deal”, not least because they have the most resources out of investment consultants and end investors.
“Fund managers are where the resources are, where the pools of assets are,” he said.
“And most trustees in the room are probably looking to their asset managers to be their guardians in the market.”
He highlighted problems in the asset management industry such as closet indexing and “a lot of competition using alpha”, but he also pointed to investors’ “atomised portfolios” as a shortcoming – “we’re all massively over-diversified”.
Pension schemes can take steps themselves, too, noted Hitchen, pointing to Railpen’s having simplified its external manager arrangements and hired a full-time member of staff to monitor fees.
The latter was a decision taken after a “forensic look” at its fees revealed the scheme was paying four times more than it thought it was.
BlackRock’s Stephens accepted that asset managers were part of the solution, but he emphasised the need to differentiate between costs and value for money, and also passed responsibility to other market participants, including trustees.
Trustees make some of the most important decisions that will affect costs and value for money, he said, with asset allocation by far the most important thing to get right.
“Are trustees spending as much time on asset-allocation decisions as they are on manager selection?” he asked.
“How thoroughly, how consistently, how frequently are trustees evaluating their advisers and the advice they are given? How easy do we providers make it for our clients to assess us?”
Three conditions need to be met for there to be effective competition, which is good for trustees, he said.
First, there needs to be choice, and second, those choices need to be differentiated.
Third, “and the one I think is less often spoken about, is the willingness of clients to choose, to make change”.
Inertia, said Stephens, was “one of the things that has got us into the situation we’re in”.
That situation, according to Stephens, is one where “the average hedge ratio is 40%, where most pension schemes are able to liquidate huge swathes of their portfolio within a week or a month, thereby ignoring attractive illiquidity premia, where adviser appointments seem if not permanent then extremely long term, and where clients extend advisory mandates into asset management mandates without open tender.”
A consultant’s view came from Robert Brown, chairman of the global investment committee at Willis Towers Watson, who said progress was needed in several areas, not just on costs, and that it was “incumbent” on every bit of the chain to pursue improvement.
With returns low and risks high, investors “have to pull every lever available to them” to increase returns, he said.
As to the structure of the industry, “the decision chain is full of agents”, all of whom are subject to potential conflicts of interest, and this needs to be managed, he added.
Costs, meanwhile, are increasingly accepted as being too high despite the market’s being competitive, noted Brown, with this down to structural factors such as information being asymmetric and buyers of asset management services being quite fragmented, and therefore weak buyers.
Aggregation, as has happened in Australia, could be a way of dealing with the latter problem, he said.
Innovation, another area to consider, has brought some good and some bad changes, said Brown, although the associated rise in complexity of investment products has typically meant higher fee levels.
Finally, according to Brown, the “relentless” increase in competition for resources, returns and talent, not to mention complexity, has driven the need for greater governance and more management resources to deal with this.
“Now, more than ever, we need to make progress in all of these areas,” he said.