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Impact Investing

IPE special report May 2018

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Smarter outsourcing

The term ‘outsourcing’ first came to light in 1979, and gained popularity in business by the 1990s as companies sought supply-chain efficiency and to concentrate on their core activity. The notion also gained currency in pension fund management.

Pension funds could meet their objectives by using best-of-breed specialist managers, and in the UK also outsourcing considerable decision-making power to an investment consultant.

But, by the early 2000s, it emerged that there was insufficient oversight of the entire investment chain of command and, frequently, nobody in charge of making sure the overall goals of the pension fund were being met. Pure outsourcing was not smart enough.

After 10 years of experience with fiduciary management, delegated consulting and other investment services that cross the strict disciplinary boundaries of the institutional investment chain of command, what has been learned? Four points spring to mind.

First, early fiduciary management models were still too focused on outsourcing of asset management, and not on the real challenge, which was actually holistic risk management.
Second, experience matters. Whether driven by regulators or not, funds are packing their boards with independent directors to play a non-executive role. Some have also been recruiting full-time staff in the areas of investment and risk management, creating professional investment offices. Funding levels, interest rates and regulatory complexity require more in-house resource.

Third, boundaries are continuing to blur. It is fine to be a product pusher if you happen to be the best of breed in US small caps or emerging market debt. But larger investment houses aspire to a more complex relationship with their pension fund clients, taking on risk management, multi-asset or fiduciary management business. To do this means to act as a trusted partner. And to succeed, these managers need to set aside resources to work for the client, and to embed this culture within their organisation.

Finally, we may not be speaking about fiduciary management so much in five years time, at least not among the larger funds. There is a healthy divergence in thinking about how to construct a fiduciary mandate and a modular approach is gaining ground, sometimes separating risk oversight from manager selection, or ‘insourcing’ the external expertise on the executive management of the fund.

This means evolution, not that fiduciary management is somehow obsolete. Now that the idea has caught on, more people are finding more ways to do it. Outsourcing is fine, but smarter outsourcing is better.

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