UK – Hewitt Bacon & Woodrow has found that most UK fund managers believe that benchmarking against an index prevents them from backing their best ideas and that so-called unconstrained mandates would lead to improved portfolio performance.
The consultancy firm polled 40 fund managers and found that 70% believe that index benchmarking prevents fund managers from “backing their best stock ideas”. And it found that 82% believe that an ‘unconstrained’ mandate would lead to improved portfolio performance.
The survey follows on from comments last month by the firm that trustees should allow fund managers more freedom when picking stocks, and let them make important investment decisions.
And it comes amid a wider questioning of the value of following benchmarks, with some observers suggesting that pension fund benchmarks should be more scheme-specific in terms of liabilities and solvency.
HBW added that 69% of fund managers say performance related fees should be adopted for unconstrained mandates. HBW said they saw this resulting in a “closer alignment of the interests of the fund and the interests of the fund manager”.
HBW investment consultant Kerrin Rosenberg said: “Not only have we found enthusiastic support amongst our clients for this idea, but our research also suggests that fund managers are consistently frustrated by the restrictions that index benchmarks place on them and their decisions.”
Fifty-four percent of those surveyed said that an unconstrained mandate should allow them to invest in any asset class. And the survey found that 79% of respondents said that most pension fund trustees lack the necessary knowledge, interest, judgement or expertise to handle an unconstrained mandate at this stage.
Rosenberg added: “Unconstrained mandates are a perfect opportunity for trustees, fund managers and consultants to work together to develop the sorts of innovative solutions that can truly produce better performance and reduce risk.”