With trustees facing an increasingly complex task in today’s tougher environment will fiduciary management take off in the UK as it has in Holland? David White reports
Fiduciary management has been a concept that has taken root most strongly in the Dutch market. Now asset managers and consultants are looking to plant it in other European markets, including in the UK.
Among managers turning their attention to the UK are Goldman Sachs Asset Management (GSAM), which pioneered fiduciary management in the Netherlands, and BlackRock which, as Merrill Lynch Investment Management won the Philips fiduciary mandate in 2005.
At the same time the UK’s big consultants have been moving into asset manage-ment with offerings ranging from ‘implemented consulting’ to full-blown fiduciary management.
For their part, Dutch asset managers and consultants are looking across the North Sea for future business. Mn Services, the leading Dutch provider of fiduciary management services in the Netherlands, is establishing a presence in the UK, while the Cardano consultancy’s London office is offering an ‘oversight’ business model that is already gaining traction in the UK.
Andre du Plessis, (pictured right) managing director, global manager strategies, and head of fiduciary management at GSAM, says three factors account for the increasing level of interest in fiduciary management in the UK.
The first is the tougher environment in which active managers in the equity markets now operate. “From 2003 to 2006 there was very little volatility in markets, an environment that was more driven by momentum rather than value factors. That kind of environment made it more difficult for certain managers to make money,” he says.
The second factor is the increasing complexity of the task facing pension fund trustees. “Trustees have done a lot of work to date on classic diversification, reorganising the structure of their portfolios, going into new asset classes, and moving into alternatives. The easy work has been done. Now comes the heavy lifting.”
This will mean adopting more complex strategies such as alpha-beta separation. It will also mean understanding how to access potential opportunities in the current investment climate: “The credit crisis has created a lot of fairly sophisticated potential opportunities and often trustees don’t have the governance to access these opportunities,” Du Plessis says. “That’s where they need help.”
The third factor is the need for better risk management. “The market turmoil that we have just been through has emphasised to trustees the importance of hedging interest rate risk and equity risk, so a lot of them are saying that they’d better take a second look at their strategic asset allocation and how they are hedging some of these risks.
“When trustees start putting all these factors together, they find they just don’t have the capabilities to do all these things. That’s where fiduciary management makes sense.”
Asset managers are confident that the fiduciary management models that have been applied in the Netherlands can be applied as effectively in the UK. Leen Meijaard, the head of BlackRock’s institutional business for Continental Europe, the Middle East and Africa, says: “Pension funds in other countries are looking for the same kind of solutions from their asset managers as funds in the Netherlands. We can offer them the kind of solutions we already offer our Dutch clients in terms of strategic advice and risk management and reporting.”
What differentiates the Dutch market for fiduciary management from the UK market is the system of regulation, and its implications for governance, Meijaard suggests.
“In the Netherlands the Dutch regulatory system is fairly transparent. Definitions of solvency ratios and investment risk, and how pension funds should calculate their liabilities, are all incorporated in the regulatory framework.
“Given this clear system of regulation, governance is more straightforward than in the UK when it comes down to where responsibilities lie - which belong to the board of trustees and which to the fiduciary manager.
“In the UK, more choice and judgement is involved. Therefore it is a more complex task to set the objectives for a fiduciary manager in the UK than in the Netherlands.”
Patrick Disney, managing director of European institutional business at SEI, which recently won a €1.5bn fiduciary management mandate from Bpf Meubel, the industry-wide pension fund for the Dutch furniture industry, says what differentiates the Netherlands from the UK is the importance the Netherlands attaches to governance.
“The governance angle means that pension funds and their boards are asking what is the best practice model for fulfilling their duties. There has been recognition that the pensions landscape, the investment landscape and the regulatory landscape are too complex and fast-moving to be able to run a pension fund using the existing model.
“If the governance angle were to be put forward more acutely in the UK, interest in fiduciary management would quicken.”
Another key differentiator between the Netherlands and the UK is the role of the pension fund trustee. The fiduciary responsibilities of the trustee effectively define what fiduciary management can and cannot do in the UK.
John Conroy, a managing director consultancy and investment management firm P-Solve, which has won fiduciary management mandates from 38 UK pension funds over the past five years, says the demarcation line is clear. “There are some things that trustees never have been able to and never will be able to delegate. That’s the ultimate responsibility of the trustees - to be involved at the executive level in decisions about what the overall objectives of the fund are.
“Once that strategic decision is made, our fiduciary management service does everything else. We decide the overall target, decide on asset allocation and outsource the securities selection to asset managers.”
Conroy suggests that combining consulting and asset management, as P-Solve has done, resolves the problem of asset managers competing with consultants in the fiduciary management space.
“Clients want their consultants to be more involved, more accountable and more able to demonstrate the added value they’re providing. Fulfilling a fiduciary role is simply one example of how that can be done.”
Conroy says consultants should come clean about what they are offering, and that implemented consulting is no more than a euphemism for fiduciary management. “Frankly, I don’t think we should be shying away from the fact that consultants are offering asset management to clients. Implemented consulting is like being a little bit pregnant. You can’t be. You are either running the money or you’re not.”
Consultants should pitch openly for fiduciary management business along with asset managers, says Disney. “I would throw down the gauntlet to consultants and say ‘why don’t you be more open about this and change your model?’ Why don’t you be more proactive with pension funds and say ‘this may be a better way of making decisions?’”
Asset managers may be tempted to go round the back of consultants and approach UK pension fund managers directly, as Mn Services plans to do. Yet GSAM’s Du Plessis says he would expect to work with consultants gaining fiduciary management business in the UK.
“Our experience in the Dutch market has been that, in most of the mandates where we have been appointed, we have been appointed under the guidance clients have received from their consultants,” he says. “We have also had consultants asking us whether we would like to become involved in a client relationship.”
One way in which the UK market could develop is through partial rather than total fiduciary management mandates. Meijaard of BlackRock says this is one of the ways he expects the market to develop in the UK and elsewhere. “One example in the UK is a mandate where we manage only the alternative investments on a fiduciary basis. We are also often hired to provide a pension fund with just strategic advice or risk management.”
How quickly will the UK market develop? Disney thinks it may be slower to develop than the Dutch market, principally because the UK’s pensions industry lacks the academic hinterland of the Dutch industry.
“The academic tradition of Holland, where you have university chairs of pensions, has had a large influence on the direction pension funds have taken,” he says. “They have taken the fiduciary route largely because of the input from academics and other forward thinkers who are powerful agents for change. That has not been the case in the UK.”
The Dutch experience has also reversed the logic of outsourcing. “The tradition in the UK is the bigger the fund the less you outsource, because you have more resources in-house. That hasn’t happened in the Netherlands where the larger funds have led the way with fiduciary management.”
In spite of the similarities of the Dutch and UK markets, a simple lift-out of the fiduciary management model from the Netherlands is unlikely to succeed. The winners will be providers that can adapt their models to the new market most effectively.