UK - Co-investment should be one of the strategies adopted by investment managers to align their interests with those of their clients and employees, Watson Wyatt says.

"We like portfolio managers to invest their own money alongside client assets, to align interests with clients," the consultancy writes in an article headlined "Picking tomorrow's winning managers" in its Global Investment Review 2007.

The consultancy noted that according to critics, the asset management industry is almost unique in that the fees paid by clients "tend to favour the asset management firms rather than their clients".

Watson Wyatt warns that the survival of investment companies might be at risk if this continues.

"Whichever way you look at it, the price of delivering retirement security to pensioners is dauntingly high," Roger Urwin, global head of investment consulting at Watson Wyatt, added. "But the cost - in human terms and to corporate reputations - of not rising to the challenge is even higher."

A solution to the problem could be alignment of interest between the investment company, its employees and its clients.

Giving analysts and managers ownership of their own products through "some form of revenue or profit-sharing" is one suggestion made by Watson Wyatt in the article.

Apart from co-investment, the use of performance fees would also help align managers' interests with those of clients. But Watson Wyatt warns that "badly designed performance fees cause more problems than not having them at all" as most tend to be "too short-term in focus, and short-term performance is more an indicator of luck than of skill".
These comments follow a warning on a connected issue concerning manager selection issued by Edouard Stucki, senior investment consultant at Watson Wyatt last week in Zurich.

He said that manager selection which is solely based on short-term past performance turns into a "dog and pony show or beauty parade".