Ready for the reckoning
The demand for performance measurement in Europe is on the up, reports Hugh Wheelan
The desire for more professional and efficient analysis of fund management and investment has led to extraordinary growth and increased expertise in the performance measurement market.
And these enhanced reporting skills are in great demand from pension funds around Europe.
Roland van den Brink, manager of policy and co-ordination at the Dutch metalworkers pension fund, says it decided to examine in detail the processes used by its fund managers, and so made the move to performance analysis. We want to see whether a manager is successful in terms of 'timing' or in buying real growth stocks, to assess the risks involved in any appointment. This ensures safer, effective decision-making." Van den Brink now believes that around 95% of Dutch pension funds are using performance measurement in this way. "Performance analysis is the only tool we have to distinguish luck from management, and I think funds will continue to tune more and more questions into the reporting skills available."
Alastair Ross Goobey, chief executive of Hermes Investment Management, which manages the British Telecom and Post Office pension funds, feels it proper today that trustees use performance measurement to ensure maximum use of assets and enable them to act as fiduciaries. "Investment managers also need to ensure the job they are being asked to do is being done. In essence it ensures the quality control of investment and the investment process."
Hermes uses fund performance against the benchmark and its peer group, as well as risk analysis to gain the investment insight needed.
This increasing desire of fund trustees to understand their investment process and ensure effective management of assets has moved performance measurement forward from just the reporting of total returns. Analysis now focuses increasingly on 'attribution' reports, concerning asset allocation and management, as well as benchmark and peer group comparison. Increasing transparency is enabling trustees to decide who is making investment decisions and what these actually mean in terms of the fund's success.
"Fund managers can no longer just claim a return increase as success," says John Stannard, managing director at consultants Frank Russell, UK, "because their investment decisions can be measured against environmental factors and peer group results, which assess their performance in terms of its opportunity cost. In turn, investment managers are using performance analysis to provide an external check on their allocation research and decisions, so essentially what we are providing is the means for constructive dialogue between the two parties."
Dependent on the data provided, measurement can be obtained on relative domestic or overseas bond and equity performance, right down to questions of timing and weighting. Subsequently, specialist tools can provide sector and growth comparisons, which can be done on a quarterly basis, to give a 'style' profile of individual funds.
Peter Warrington, director at performance measurement providers WM Company in London, believes performance measurement at this depth has contributed to the "collective wisdom" of funds in the UK to move heavily into equities. "It has been an influential factor in returns success here and is one of the main reasons Europe is following suit."
The UK market is dominated by two outfits. CAPS, the amalgamated performance measurement group form-ed by Sedgwick Noble Lowndes, Mercer, Bacon & Woodrow and Watson Wyatt, measures 1,630 funds with assets of £306bn. WM measures around 1,600 funds. Frank Russell also provides a UK service.
All offer complete attribution services, and see the future lying in in-creased IT technology for on-line re-porting and more detailed stock selection analysis.
In Ireland performance measurement mirrors the UK system, with CPMS, a joint venture between Mercer and Irish Pensions Trust, part of SNL in the UK , reporting on 90% of the institutional market with 200 funds worth IR£13bn.
The Dutch performance measurement market, split between Russell, WM and Stichting Performance Measurement, focuses predominately on benchmark comparison. Johan Cras of Frank Russell in the Netherlands believes this is due to the varied asset allocation of Dutch funds and their desire to reflect fund liabilities, rather than mirror the UK tendency to follow the CAPS median or mimic peers. Legislation, such as the recent STAR commission obliging mandatory public declaration of asset allocation benchmarks for industry pension funds, had influenced this trend, he adds.
Stichting Performance, which re-ports on a universe of 50 Dutch funds with average capital of Dfl1bn, also notes this increasing "professionalism" regarding analysis. "The need for an objective third party to produce results and comparisons is becoming noticeably important here, with more and more companies de-manding attribution services," says Cees Zweekhörst, head of Stichting Performance's measurement department.
Belgian performance measurement is carried out by the Association of Belgian Pension Funds or by Mercer. However, the association differs by collecting data directly from its 140 pension funds and ranking them in performance order, with no distinction for non-discretionary funds. Mercer receives its data from money managers and performs overall and sectoral return comparisons to the median.
" Our survey in Belgium is very standardised, with no peer group comparison. But we are doing more benchmark analysis following requests from larger funds," says Willi Santermans, assistant manager at Mercer in Brussels.
Performance measurement is also becoming increasingly popular in France, according to Alexander Lengereau of Frank Russell, Paris, the country's sole supplier. "Attribution reports are becoming more important and 'style' profiles are developing to suit demand in what is becoming a more concentrated, sophisticated market," he notes.
In Switzerland, the larger pension funds are spearheading the move towards rigorous performance measurement analysis, seen as a knock-on effect of 1996 legislation obliging all companies to produce an investment strategy.
The focus for performance companies such as Intersec, which shares the market with Russell, has been on the areas of 'depth' analysis in attribution, including comparison of portfolio stock selection.
However, the predominance in Switzerland of small to medium funds means that performance measuremen t is still done for the most part on the basis of return comparison to the benchmark, according to Marc Wright of Frank Russell.
"Small funds in Switzerland are tending to use standardised benchmarks and concentrate on these rather than peer performance, so the market still needs education about issues like performance attribution," he says (see box).
Italy though, which has seen the accumulation of thousands of funds lacking in transparency and means of analysis, has proved a lucrative market for Intersec, the country's first performance measurement provider. Intersec's David Booher says there has been an "enthusiastic evolution pro-cess" in its early stages of application, started with a universe of around 30 funds.
Germany is still very "cloudy" about how asset management should be monitored, says Jörgen Detering, managing director of WM, Germany. Awareness of performance measurement is increasing, however, and the systems available are at an advanced stage.
"KAGs [investment management_companies] and investors are recognising a need for manager comparison reports or single stock analysis, and we now have around 40 Spezialfonds being measured in this way. With Germany set to adopt GIPS compliant standards later this year, I think most funds will follow," he adds.
Particularly important is the German move toward measurement of internal assets, with WM developing a valuation model to assess 'non-listed bonds', previously not measured. "This is essential if we want objective results, because 80% of German assets are internal," Detering stresses.
Two years ago, nine KAGs founded Deutsche Performance Messungesellschaft, which rivals WM, reporting from single sector to total fund level for 150 clients with 1,500 portfolios. "There is a German cultural shift from absolute to relative thinking in terms of performance," managing director Hans Pieper says. "Funds now want to know what are 'good' results compared to benchmarks and risk, so they can improve internal control."
The Spanish market has proved difficult in terms of providing performance measurement. Previously, figures obtained from the Gestoras, which manage Spain's pension funds, were considered unreliable because some fund managers reported market value figures and others book values, with little clarity over whether figures were net or gross.
However, Juan Carlos Martinez, consultant at Mercer, Spain, reports that headway is being made. "Following our launch in 1997 we now have 16 funds being measured here and the general opinion in the market is favourable to what we are doing. But we are still having to work to procure interest. Funds using performance measurement though are calling it a ray of sunshine compared to what existed previously."
Basic return reporting is also provided in Spain by Inverco, the Spanish pension fund association.
Conversely, in Portugal Mercer and Watson Wyatt are competing in a steadily growing business. Bernie Thomas, senior consulting strategist at Wyatts, reporting on around 200 funds, commented: "Funds in Portugal have developed quickly and are now looking strongly at attribution and risk-reward analysis. Quite a few are setting up customised benchmarks also and we are measuring against these."
Certainly, the future for European performance measurement looks bright, with most companies pointing to expansion plans as the market develops. Emu implementation is being seen as just another currency that if anything will simplify measurement reporting, although concerns are being raised over historical record denomination.
Questions are also arising over how funds will seek to classify sectors in a pan-European economy, for example, whether Renault, BMW and Fiat come into an integrated 'auto' category.
Approaches to the increasing provision by custodians of performance measurement do differ though. WM believes the 'one-stop shop' return re-porting by custodians will not greatly affect their depth analysis services.
Frank Russell, however, partnered with custodian Mellon Trust feels a 'synergy' of these two organisations in data provision and analysis will become their biggest growth area.
One thing is certain though - performance measurement companies are ready for the rigours of the complex and competitive future pension fund and investment market. As WM's Warrington explains: "The products are available for performance to be measured in as many ways as money is managed. Now we just need to bring the market up to speed with how best to use them.""