Biting the hand that feeds
IPE’s look at investment managers’ attitudes to consultants makes sobering reading for some consulting giants.
When asset managers were asked to name the five firms that impressed them most in order of preference some of the biggest firms barely got a mention, while others failed to be number one with any managers.
In principle, managers feel big consultancies have a better understanding of them and their processes. But a number of smaller firms have grabbed their attention, with one or two relative unknowns making a huge splash.
In a slap in the face for the industry, managers say consultants provide value for money to pension funds only ‘sometimes’, rather than usually or always.
Their research and databases are ‘moderate’ and their ratings systems compromised by a lack of transparency and a tendency to be overly conservative, say managers.
Respondents were asked to name the consultants who had shown the greatest ‘professionalism and expertise’.
The 38 responding managers show little allegiance to the big players, producing a roll-call of 40 companies.
Watson Wyatt is the favourite both for the number of times it is named and its rankings (See chart for order combining rankings and number of mentions).
The firm, mentioned by 25 managers, also comes first the most times (11).
Frank Russell is next in terms of coming first, with six nominations, and Mercer Investment Consulting comes third with five.
But this is where the big boys lose their grip. In fourth place two top rankings is PSolve Asset Solutions, a UK company launched in 2001 by South Africa’s Sanlam Financial Services. And fifth place is shared by Switzerland’s Ecofin Investment Consulting; Germany’s RMC Risk Management Consultants; the UK’s SBJ Benefit Consultants; the US’s Wilshire Investment Consulting Services and Russell/Mellon CAPS.
After Watson Wyatt, Mercer comes second for the number of mentions (21), Frank Russell third (16), Hewitt Associates and Hewitt Bacon & Woodrow fourth (10) and the ubiquitous PSolve, fifth (6).
Nearly two thirds think consultants are usually or always impartial.
But only a third say they usually provide value for money, with 5% saying they always do. Nearly 40% feel they are only sometimes good value, with 13% saying they rarely are and 5% never.
“By sometimes we mean that some consultants provide consistent value for money and some consistently don’t, rather than that all consultants sometimes provide value for money,” says one medium-sized US manager.
Nearly three quarters give consultants’ research activities and databases a moderate rating, with 11% having a low opinion of these and only 8% a high one.
Managers are a little more positive about their rating systems, with more than half saying that these, where they exist, are effective.
But such systems are “only useful if they are transparent and openly discussed with managers,” says a medium-sized UK firm.
Consultants’ systems are “too opaque in contrast to database vendors’ systems which are very transparent but too simplistic,” says a small UK house.
They need instead to be “more transparent with asset managers in disclosing ratings and the rationale behind them,” says a US giant.
The ratings are “subjective and discussions are not encouraged bet-ween managers and consultants,” says one pan-European house. “Since very few managers are on the consultants‘ buy lists, presumably a lot are given the same rating.”
An independent UK multi-manager pours scorn on consultants who “rarely recommend anything but the largest, most useless investment managers. They have done a great disservice to the pension fund industry over the years.”
The pan-European firm agrees that “they do not carry out sufficient in-depth research to find managers or try to find new up and coming fund managers”.
“Most consultants are too conservative, sticking to their old list. Not giving new managers some room,” agrees a small Scots firm.
A small UK house feels angry that: “consultants do not have the resources or inclination to investigate our products, which are non-traditional. The fact that our absolute return approach has consistently outperformed traditional benchmark approaches seems to have passed them by”.
Consultants also set too much store by past performance, say several managers.
“Pension funds are driven by past performance and consultants, for commercial reasons, fall into the same trap,” says a large UK firm.
An Italian giant has a little more faith in ratings systems, saying that they work, but “there is the possibility that they pay too much attention to track records.
“Manager selection probably could improve if consultants could get further away from past performance.”
The UK subsidiary of a US hedge fund multi-manager condemns consultants for often being “overly impressed by individuals rather than analysing teams” and reacting “very poorly to change, both positive and negative”.
Ratings are too subjective and key decisions rest with one individual, complain the pan-European manager and a mid-market UK house.
Consultants have a UK bias, says one pan-European manager. “Consultants tend to centralise their activities to London and use a central database, so international pension funds tend to go directly to London-based consultants or get directed to them by local branches.”
Consultants need some kind of system bearing in mind their need to cover “literally thousands of investment managers”, says one mid-market US manager. These give an “efficient and consistent” framework. But “it seems that good firms/products do slip through the cracks of such rating systems,” it says.
But a large UK manager commends consultants’ systems. “Generally they focus research on the main question - whether the manager is capable of delivering future outperformance. This requires assessment of both hard and soft issues and generally the balance is about right.”
Love them or hate them consultants are the source of an average 50% of respondents’ business.
More than 40% of managers say consultants are a help in obtaining business and 26% a hindrance.
They “introduce us to a wide range of prospects with less resource required than to access them directly,” says a medium-sized US manager.
Once you’re on the short-list for a certain asset class you “get invited to presentations, and often without having to fill out RFPs,” enthuses a large UK house.
They have a valuable role in educating clients and “ensure consistency between pension fund targets and fund managers’ investment approach,” says the Italian giant.
But they often make “the direct relationship between the asset manager and the investor harder to establish. The comprehension of the investor’s issue is hindered and it is more difficult for the asset managers to add value,” says a large Belgian firm.
The consulting industry can look forward to growth on the continent, while UK and US markets will be more static, say managers.
“In the US the market and regulatory environments since 2001 have provided a boon to the consulting business,” says a mid-market US firm. “Fiduciaries have been hiring consultants in droves as a result of the complexities of the investment landscape and the potential for liability when a fiduciary acts without third party input.” As a result “there is tremendous maturity” in the US, it says.
Consultants can take some cheer from the fact that managers are not interested in going into consulting themselves. Of the 83% whose groups don’t have a consulting arm, nearly two thirds say they have no intention of setting a service up, with just 8% saying it is possible, 11% saying they don’t know and none saying they are going to.
Managers obviously just prefer to criticise from the sidelines.