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Magazine Issues » June 2009


The founder of fiduciary management says providers should not invest client money with their own managers. Angèle Spiteri Paris finds out what some of Europe’s leading players think.

eggs.jpg When a £1.95bn (€2.2bn) local authority appointed HSBC Actuaries and Consultants to oversee a pensions investment mandate in May, it surprised certain asset managers. The Bath & North East Somerset Council appointed HSBC to a fiduciary management role – a line of business not previously identified with the firm.

Fiduciary management is sold to pension funds on the principle that it cuts away the complexity of monitoring several asset managers by contracting out investments to just one provider. This provider, the fiduciary manager, then takes on the responsibility of constructing portfolios and hiring and firing managers in line with the pension fund’s objectives.

The concept has taken root most notably in the Netherlands and a number of big brands, including Goldman Sachs Asset Management and BlackRock, have long since entered the business in Europe.

But providers in the sector face scrutiny. If they are part of, or attached to, an asset management firm, then there are questions about how much of their fiduciary assets are placed with their own investment manager.

Anton van Nunen, creator of fiduciary management, runs Van Nunen & Partners. He says: “I have a very outspoken view on fiduciaries using their own products. If a fiduciary manager is managing assets [in-house] to a large extent, then the red light bleeps and I question whether this is the best portfolio.

“It cannot be that one manager is the best manager for 80% of the portfolio.”

Patrick Disney, director of institutional business EMEA at SEI, claims: “The fiduciary managers who come from a manufacturing background have a bias towards using their own products.”

SEI offers fiduciary management, but Disney says the firm manages all its fiduciary assets through external managers within a manager-of-managers process.

Similarly, Charles Janssen, client relationship manager at Fortis Investments, says: “There are contracts out there in which 100% of assets are managed internally.” But he says at Fortis, which also offers fiduciary management, the majority of fiduciary mandates have less than 25% of their assets in Fortis products.

BlackRock manages $21bn worth of fiduciary assets globally, as at March 2009. The firm says it does not have a figure regarding the average ratio of fiduciary assets managed internally to those managed externally.

However, Mark Johnson, managing director at BlackRock, says: “The ratio of assets managed internally and externally varies significantly and there are important client considerations to be made.

“The question we would ask ourselves is in what area is manager selection most important. Alternatives, for example, is one area where manager selection is absolutely vital. It’s less evident in other asset classes…

“We also look at where we can get alpha. Does going out and finding the best in class guarantee added value? It may not.

“You also have to consider the cost involved. Often you may be remunerated on a performance basis and that may be easier to manage if some of the assets are managed internally.”

Goldman Sachs Asset Management did not give a figure for its internally managed assets, or answer further questions.

A sensitive area
On the surface of it there a good reasons to question whether fiduciaries use internal  management to generate fees rather than  for the wellbeing of clients. But not all critics see internally managed assets as a bad thing. Frits Bosch, founder of Bureau Bosch, a Dutch asset consultancy, is a little more lenient if objectivity by the fiduciary can be assured.

“The fiduciary management department of a firm should look at their own internal management as if it were an external manager and compare it to their peer groups. It is up to the asset consultant to find out if they really have chosen the ‘best in class’.”

The use of internal products by the fiduciary manager is in no way a surreptitious practice, he says, as individual contracts between the fiduciary provider and their clients outline how much of the mandate can be managed internally.

Ton van Welie, CEO of Ortec Finance, a risk management consultancy, says: “It’s true that the fiduciary manager has a limited set of capabilities and although this is restricting, is it a disadvantage? I’m not sure it is.

“In most cases the fiduciaries have more capabilities than most of the pension funds need in their strategy.”

Cees Blokzijl, director of pensions at Vopak Pension Fund, says: “In the two fiduciary mandates we have had, internal as well as external funds are possible. The decision for internal and external funds is taken in consultation between the manager and the pension fund.

“At all times it should be the best solution for the pension fund and shutting out the fiduciary manager for asset allocations would be strange if that would be the best solution for the pension fund.”

The Dutch pension fund recently appointed BlackRock as its fiduciary manager, replacing Mn Services after six years.

Consultants say there have been cases of internally managed assets that should have been outsourced. Paul Boerboom, founder and managing director of Avida International, says: “I can think of one or two examples in the GTAA [global tactical asset allocation] space. GTAA is what I define as ‘alternative’, and is where manager skill is very important. So by definition doing it internally is not necessarily a good thing.”

Remco van Eeuwijk, managing director at Mn Services, adds: “In the case of GTAA, the problem is that you’re taking a very risky asset class with very high volatility of individual managers. Then [you are] making only one appointment in that asset class – which is not appropriate for that asset class – and on top of that, the one appointment is of your internal management team.”

One image problem fiduciary managers have to deal with is accusations that they are not much different to balanced managers.

Van Welie, at Ortec, says: “To be honest, if you really look at the contracts that are signed between the pension funds and the fiduciary manager, they will look extremely similar to the old balanced mandates.”

However, even this may not be a bad thing. Sorca Kelly-Scholte, director of investment strategy at Russell Investments, says: “Balanced management has got a really bad name but the fundamental ideas behind it weren’t amiss. The model itself wasn’t fundamentally broken, but at that time there wasn’t a clear articulation of the mandate from clients and there probably wasn’t a clear enough understanding of the liabilities from the balanced manager’s side.”

Van Welie says: “At least with the old balanced mandates there were three or four managers with balanced mandates, meaning there was some diversification. In the fiduciary management space you typically stick with one manager, so pension funds could be worse off if you look at it from a negative perspective.”

Van Nunen says there is no similarity between fiduciary management and balanced management. “To me it’s exactly the opposite. A balanced manager is claiming that he is the best in fixed income, equity, real estate or whichever asset class the client wants.

Grey area
“The fiduciary manager on the other hand is good at especially two things: calculating the best portfolio that fits the risk budget, and then having a department that selects managers all over the world in all asset classes. Fiduciary managers have to be able to select managers more than manage money themselves.”

For an asset manager to build a brand in fiduciary management is not easy. First, it seems, the asset manager has to persuade clients that it has the in-house capability to meet many different investment demands, and secondly, promise to hardly ever use it.

But whatever trustees feel about the debate surrounding internally managed assets, the most important thing is to not lose sight of the fact that trustees are still the accountable fiduciaries at the end of the day. They need to understand that not all decisions can be outsourced.

Fiduciary management founder Van Nunen says: “There is this grey area where the fiduciary manager takes decisions which in fact the board should have taken. This is wrong, but as long as there is no real failure and as long as the returns are normal, then I think that nobody cares.”

©2009 funds europe