Fiduciary Management – Goldman Sachs Asset Management


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Fiduciary Management – Goldman Sachs Asset Management

  1. 1. Fiduciary Management – Goldman Sachs Asset Management Responsible pension fund management is very demanding in terms of time and expertise. To help manage your returns, it is important to find a partner whose interests are aligned with yours. At Goldman Sachs Asset Management, we tailor our fiduciary capabilities to match your fund’s specific needs. We bring you our knowledge of the global investment markets and our market leading risk management systems to help you achieve your investment aims. We give strategic investment advice, select and monitor external portfolio managers and provide customised integrated reports to help deliver you peace of mind. We believe that where there is accountability, there is trust. For further information please contact Ruud Hendricks on +44 (0) 20 7774 1354 or Pepijn Heins on +44 (0) 20 7051 1890 This material has been communicated in the United Kingdom by Goldman Sachs Asset Management International which is authorized and regulated by the Financial Services Authority (FSA). Copyright © 2008, Goldman, Sachs & Co. All rights reserved.
  2. 2. June 2008 Fiduciary Management A new way forward for Europe?
  3. 3. FIDUCIARY MANAGEMENT Fiduciary management – a model for Europe? T he rise of fiduciary management in the Netherlands since 2002 has also coincided with the move of consultants to offer what is termed implemented consulting. And since the fiduciary management concept rests on best- of-breed outsourcing to external providers, it has been easy to make a comparison with multi management and implemented consulting models. The models are to some degree an answer to similar questions: pension funds frequently do not have the resources in house to implement their strategic asset allocation, to select and monitor the right managers, and to comply with increasingly onerous regulation. But, as is argued in this supplement, fiduciary management in its purest form is a distinct approach, and more comprehensive than either implemented consulting or multi management. The simplest way to look at fiduciary management is to see it as an investor-led approach. It is not a product, and cannot be replicated in any standardised or pooled form since it entails extensive tailoring of investment services to clients’ needs. Or, as it is described in this supplement, it is a ‘solution pull’ and not a ‘product push’. The intensity of the relationship between investor and provider in the fiduciary management model means that capacity is a key factor. Not all providers may be able to offer the level of service that the fiduciary model demands, and this is now a key area of due diligence for Dutch pension funds and their advisers when assessing the market. Adopting the fiduciary management approach does not entail less work for the board members or trustees of a pension fund. It still requires these fiduciaries to set the strategic goals of the pension fund and the strategic asset allocation. They can expect a close on-going relationship with the fiduciary manager. The case studies in this supplement (pages 7-8) show that fiduciary managers can also offer a faster route to tactical exposure to asset classes that are considered undervalued – such as financials following the recent credit crisis. Such exposure can be implemented more quickly than would often be the case in the traditional pension fund model, where the investment committee and the main board would probably both be involved in the due diligence and the ratification of the decision. Dutch fiduciary managers now have assets under management in excess of €100bn, and may be approaching a natural plateau of demand in the Netherlands. But the approach has attracted interest in other countries. The UK National Association of Pension Funds discussed the fiduciary approach at one of its recent conferences. Two firms, Mn Services and Goldman Sachs Asset Management (GSAM), both presented the concept at an event in Sweden recently. At the same time, Mn Services is looking to offer a fiduciary management concept in the UK, and Cardano has been in London for a year now. GSAM has recently been awarded two German pension fund mandates. Likely adaptations of the fiduciary management model may be partial outsourcing models, whereby alternatives could be outsourced in a dedicated alternatives portfolio. BlackRock has implemented one such mandate in the UK for Cumbria County Council. Terminology is sometimes the enemy of clear communication. The term fiduciary management has been useful for a wide array of Dutch providers in describing their somewhat similar services. But given that wide range of approaches, and the use of the term ‘fiduciary’ in UK and Irish law, it is unlikely that it will catch on in those markets, or indeed in other markets. This probably has very little bearing on the adoption of the concept in practice, however. The governance constraints of increasing regulatory and investment complexity have been a key factor behind the growth of the fiduciary management model in the Netherlands. Given the fact that these conditions also apply elsewhere in Europe, it is our view that there will be some demand for fiduciary-type services in other countries. Aside from the issue of terminology, it is also unclear who will be the successful providers of this new type of investment service. We already see Dutch providers entering the UK market and looking at other countries with interest. Perhaps the most successful providers will be the ones with the resources to explain the concept to pension funds and the wider market. Healthy competition will also assist them in getting their message across. Liam Kennedy, editor, IPE CONTENTS How the fiduciary model works in practice .................................................................... 2 Guest view: Anton van Nunen ........................................................................................ 5 Case study: Pensioenfonds Vervoer ................................................................................ 7 Overview of fiduciary mandates ..................................................................................... 7 Case study: Pensioenfonds MITT .................................................................................... 8 Table of fiduciary managers and services ....................................................................... 9 Outlook report: Germany and the Nordic region ........................................................ 10 IPE Portfolio Management Functions survey ................................................................ 12 Illustration of governance, investment process and fiduciary management .............. 15 Illustration of fiduciary management classifications .................................................... 16 Fiduciary Management is published as a supplement to the June 2008 issue of Investment & Pensions Europe Editor: Liam Kennedy; Contributors: Pirkko Juntunen, Anton van Nunen, Carolyn Bandel, Jucelia Pilatti Cover illustration: Andy Potts IPE International Publishers Ltd, 320 Great Guildford House, 30 Great Guildford St, London SE 0HS, UK. Tel: +44(0)20 726 0666, Fax: +44(0)20 7928 3332, Web site:, ISSN 369-3727 Investment Pensions Europe is published monthly by IPE International Publishers Ltd. No part of this publication may be reproduced in any form without the prior permission of the publishers. INVESTMENT PENSIONS EUROPE Printed by Hastings Printing Company, Drury Lane, St Leonards-on-Sea, East Sussex TN38 9BJ. IPE JUNE 2008
  4. 4. FIDUCIARY MANAGEMENT How the fiduciary model last 10 years. So where a €500m or €1bn pension fund previously may only have invested in local fixed income and equity, works in practice exposure to local currency debt, global real estate, hedge funds and private equity are now normal. Larger pension funds are With assets in excess of €100bn and a track record that stretches seeking exposure to commodities alpha, forestry and music back six years, fiduciary management has sparked considerable rights in portfolios of exotic beta investments. The focus interest and debate both in the Netherlands and further afield. on pension fund governance in conjunction with increasing Liam Kennedy interviewed senior executives at fiduciary investment and regulatory complexity have sparked an management providers for this assessment. ever-widening interest in the concept of fiduciary management, A both among pension funds and t conferences, pension service palette, or have mandates, it is only providers. associations and in pen- rebranded an existing now that they are sion fund boardrooms strategy as fiduciary seeing more smaller Who can be a fiduciary the Netherlands over, management, seasoned funds opting for the manager and how? fiduciary management observers point out concept. There are more than 20 providers of pension assets has been dis- that not all can offer a The science of active in the Netherlands cussed at length in recent years. credible service. pension fund fiduciary management First coined by Goldman Sachs But despite or governance has marketplace – from those with Asset Management (GSAM), the US because of the developed over a pure play multi-management asset manager also widely credited fiduciary label, the last few years, background, such as SEI, to US with its popularisation, the term discussion of fiduciary propagated by such players such as BlackRock or has come to describe what is in fact management has luminaries as Keith GSAM, local asset managers a wide-ranging set of services that quickly turned into Ambachtsheer and such as ING/AZL, local players would usually be undertaken by action on the part of Don Ezra in their with an insurance background, pension funds themselves. institutional investors Molenkamp: ‘align 1998 book Pension such as Syntrus, and other local The term was quickly and and pension funds. interests’ Fund Excellence: players that have grown from the widely adopted by a range A steady stream of Creating Value for in-house operations of pension of asset managers – domestic mandates has been Stakeholders. funds, such as Mn Services or asset managers, pension funds awarded since GSAM One reason for the Cordares. and administration specialists, took the first one adoption of fiduciary As the range of backgrounds US-based investment houses in April 2002 when management in the of the different providers would and multi-managers alike. So health insurer VGZ Netherlands has suggest, each comes to the market by about 2005, more than 20 chose the fiduciary probably been a with a different business model different providers had adopted route for the heightened awareness that emphasises different aspects the fiduciary management label management of its of pension fund of the value chain. “I think asset and were regularly responding to then €1bn. governance, and managers and consultants have tenders. Some asset managers who The April 2005 greater responsibility failed to point out what fiduciary were previously critical of the sale of Philips’ in law for internal management, as we see it in the fiduciary label eventually adopted pension fund pension fund Netherlands, is all about,” notes it – so sticky had it become. asset management governance. Frits Bosch of Bureau Bosch, Providers and advisers agree business to Merrill And in countries describing the thinking behind on the usefulness of the term Lynch Investment outside the a recent report which sought to Hendriks: ‘role of to describe an all-in asset Managers (MLIM, consultants’ Netherlands, there is categorise the various approaches, management solution providing now BlackRock) for an also at least a debate including fiduciary management services along the investment undisclosed sum – and and a heightened “the Dutch way” and US multi- value chain that go beyond multi- the simultaneous awareness of how management approaches. asset, multi-management – from appointment of MLIM pension funds For one, there are different ALM to portfolio construction to run its €12bn in should structure attitudes as to whether a fiduciary to manager selection to risk pension assets on themselves and the manager should only appoint reporting. However, those same a fiduciary basis level of resources external managers or whether providers and advisers also – marked the fiduciary they should commit some assets should be run by the concede that the term has its management route themselves to. Or fiduciary manager where it has a disadvantages. as a clear trend for to put it in terms credible strategy, not least to save First, it is essentially the Dutch pension favoured by Roger on costs. meaningless, including in the industry. Last autumn Urwin of Watson Goldman Sachs’ approach Netherlands, where the fiduciary none other than Wyatt: what their stems from its New York-based duty of pension fund board the pension fund of governance budget private client manager selection members cannot be outsourced the Dutch Central should be. Urwin says capability, and its model is to to a third party. Second, the Bank (DNB) selected pension funds should outsource all asset management label is not helpful or indeed BlackRock for the Bosch: ‘capacity issues’ determine their level to external parties. The likes of appropriate for adoption outside fiduciary management of governance and SEI and Russell, also active in the the Netherlands, even if the of its €1bn in assets. operate accordingly. Netherlands, naturally operate on underlying concept may well May 2006 saw the award of the At the same time, regulatory a multi-asset multi-manager basis. be appropriate for markets such assets of the Dutch transport demands have been increasing, Others, like Mn Services, as the UK, Sweden or Germany, industry fund Vervoer (then especially concerning solvency developed from the in-house where GSAM has already picked €5.4bn) to GSAM, while other levels in the Netherlands, investment capabilities of pension up two mandates. multi-billion euro investors Denmark and Sweden, but funds themselves. Mn Services The range of services offered by like the €3.2bn Merchant Navy also with respect to the manages around 50% of its assets the various managers under the fund also opted for the fiduciary internal governance of pension internally – euro fixed income auspices of fiduciary management route – in this case mandating institutions. and equities, and emerging also differs in details as well as in Mn Services earlier this year. In addition, the range of market bonds. fundamental concepts. Although Interestingly, as fiduciary investments within a typical Jan Bertus Molenkamp, senior more than 20 managers have managers in the Netherlands pension fund portfolio has fiduciary manager at Kempen added a fiduciary offering to their note following these big-ticket increased exponentially in the Capital Management, believes 2 JUNE 2008 IPE
  5. 5. FIDUCIARY MANAGEMENT the question of internal or All agree that choosing to offer remain the province of the may have a horizon of 15 years.” external responsibility for pre- fiduciary management puts more pension fund’s board itself. As He continues: “Fiduciary defined functions is not the most onus on asset managers to focus Johan Cras, managing director for management is not meant important issue. “It’s more about on the client to provide a tailored institutional investment services automatically to be a replacement making sure interests are aligned,” range of services to the investor. for Europe at Russell Investments, of your existing organisation. he says. Kempen itself outsources The client focus is extremely puts it, allowing a provider You see a lot of examples where most areas of asset management, important, stresses Molenkamp. to determine strategic asset there are hybrids, where tasks apart from some niche areas “The client’s need for a solution allocation is like asking a lawyer are divided between the pension where it is strong, such as small may be new in a commercial sense to draw up your will. fund and external parties. For cap equities. because it was not commercially If fiduciary management is instance, on the strategic side, you Corestone, the Swiss-based offered before. This is less about about retaining in-house control see large pension funds organising manager selection unit in which product push and more about of strategic policy, rather like overall policymaking themselves Robeco has a financial interest solution pull.” the supervisory board of a while relying on the policy as part of its fiduciary offering, Another challenge is company, then a pension fund and implementation support of emphasises the implementation to achieve the balance needs to consider carefully the fiduciary managers.” aspects of portfolio construction. between customisation and internal structure needed to Mlynár emphasises the “Manager selection and research standardisation: “Fiduciary manage the fiduciary manager importance of management in the context of portfolio management is less about assets – who is responsible for detailed information in the reordered construction is one of the most than about the number of clients investment knowledge and day- board structure. “An annual important issues,” says Martin you serve,” adds Daan van der to-day oversight – on a long-term report is not enough to manage Mlynár, CEO of Corestone. “You Werf, director at Kempen. He basis. a company,” he says. “You can set strategic asset allocation believes a provider can hope to Although some pension need monthly management but if you don’t implement it service a maximum of 25-30 funds with strong internal information and I believe the properly the intended effect fiduciary clients successfully. governance have opted for the communication between the of that in the long run could Others in the market observe fiduciary route, others, like the asset manager, consultant and be jeopardised. What we have the danger of capacity problems Vervoer transport fund, went to the board needs to be similar learned over the last five years if fiduciary managers absorb fiduciary management from a to the communication between is that implementation will assets without the necessary in- total outsourcing model, with the divisional director of a make or break the result for house operations to manage and a pension administrator and a multi-national and a CFO and a the pension fund. What is service the clients: “Fiduciary balanced manager. For Vervoer supervisory board. Management implementation? It is a clear investment policy, manager selection, risk management, and Traditional management Fiduciary management proper monitoring, managing the tactical exposure within the asset Custodian Custodian Client Consultant allocation.” Syntrus Achmea Asset Consolidated Portfolio Management (SAAM), uses Reporting Construction Portfolio Fiduciary the term financial pension Consultant(s ) Manager Manager(s ) Performance Overall Risk management, which it says can Monitoring Management be seen as fiduciary management Client plus. This includes ALM, risk Financial Performance management and advice, and Reporting Measurement External External E xternal balance sheet management. Manager Manager Manager Syntrus Achmea is the largest third party pension fund servicing Overall Risk company in the Netherlands . Management Otto Veldt, director of SAAM, Source: Goldman Sachs Asset Management believes the most important advantages for clients in fiduciary management are broad access management is becoming so this meant building up an internal information is the instrument to knowledge and products, popular that capacity problems management support office. to steer the company, or in this continuity, and purchasing power will occur,” says Bosch. “Clients should see us as their case to steer the pension fund when, strategic advice, balance investment department,” says Van allocation.” sheet management and external What does the client der Werf of Kempen. “The board managers come into question. need to do? members are still responsible in Fees Veldt sees Syntrus’ ability to A fiduciary manager provides the end for the investments so Bureau Bosch recently produced deliver integrated reporting both a greater range of service along they have to monitor us. If you a report that segments the on the asset as well as on the the value chain of institutional choose fiduciary management various approaches to fiduciary liability side and on the condition investment decision making, you only have one point of management. Frits Bosch of of the balance sheet as one of from ALM through to monitoring contact and that is why we see an Bureau Bosch notes that fees his firm’s key advantages. “A lot and reporting. However, in the important role for consultants as for fiduciary management are of managers and consultants Netherlands, but also in countries adviser to the board or sitting on trending upwards: “But if you provide reports on one or more like the UK, fiduciary duty the investment committee.” have alternatives in the portfolio, components but we have moved cannot be outsourced, so ultimate There is little consensus on how this makes it difficult to compare towards integrated risk and responsibility still rests with the to judge the performance of the the various modes,” he concedes. balance sheet reports,” he says. pension fund’s board. fiduciary manager and over what The Bosch report also notes that “It is especially hard for small If an internal investment team timeframe. Since there is also no the average fiduciary portfolio to mid-sized pension funds to is present, the appointment of a standard template for fiduciary costs 34 bps; 11 bps higher than organise this themselves.” fiduciary manager does not make management, Dutch pension the average actively managed Some fiduciary managers have them redundant. On the contrary, funds have paid particular portfolio, which comes at a cost of offered add-on services, such as if the fiduciary model represents attention to service level 23 bps. transition management or global a step forward for an investor agreements. The level of the risk premium tactical asset allocation (GTAA). in introducing investment “You can benchmark manager and the managers’ remuneration is In the case of GSAM, its GTAA diversification that was not selection but ALM, advice and of course the subject of discussion strategy has been less successful. present before, the investor may strategic advice is more difficult,” between client, manager and Ruud Hendriks of GSAM even need to step up its internal notes Veldt. “It is possible to consultant. Molenkamp says emphasises that in the early resources, by appointing internal benchmark components, for actions will be different according days of fiduciary management, staff or external experts, such example, if you use derivatives for to the benchmark that is defined. GSAM was one of the few GTAA as consultants, to sit on the risk management you can measure “Often asset based benchmarks providers with a good track investment committee. the effectiveness of the hedge. But are used to evaluate the fiduciary record, so it seemed to be a logical There is a consensus that you cannot easily benchmark the manager where liabilities plus a idea to include this capability. strategic asset allocation should effectiveness of an ALM, which risk premium provide a better IPE JUNE 2008 3
  6. 6. FIDUCIARY MANAGEMENT aligned benchmark. There is Netherlands in the early years of prevent competitive information reasons to suppose that the same potential for huge misalignment the concept – particularly since leaking from manager or fiduciary drivers and impulses will apply in using asset based benchmarks. it came about just at the same manager selection staff to the in markets such as the UK or If, for example, we think time as the likes of Mercer were implemented consulting or multi- Germany. equities are going down we will planning to launch their own manager area. Whether those services are underweight equities, but not to multi-manager services, from the “Another concern is that there branded fiduciary management the same extent as if we have the basis of their own manager search is no transparency,” continues or not is largely immaterial since liabilities of the pension fund as and selection capabilities. Hendriks. “You would find it terminology is not the issue here our benchmark,” he says. But this situation has changed, very difficult to get comparable – it is more the growing awareness Hendriks is concerned about the and fiduciary managers emphasise performance information. I have of the capabilities needed to low level of fees – it is understood that they work closely together never seen the performance manage a modern pension from market participants that one with consultants. “Nowadays you figures of others and there is no fund portfolio in the light both recent mandate was awarded for see more and more consultants objective organisation that can of regulatory and investment 10 basis points all-in. He doubts advising clients about fiduciary provide performance information frameworks that are increasingly that providers offering such low management,” notes Van der for a pension fund considering demanding. fees can provide the necessary Werf. “There are also now a larger hiring a fiduciary manager. A The wide range of services on service: “The only way they can number of investment managers consultant must be well educated offer in the current fiduciary do that is by managing a lot of the offering fiduciary services, so and be able to explain to clients management marketplace only assets passively, by not including consultants are examining more the variables behind the figures, serves to emphasise that there is alternatives, and by putting a lot closely what the pension fund is such as asset allocation or tracking no single overarching definition of funds in the portfolio. This looking for, and which fiduciary error.” of fiduciary management. The worries us,” he says. Consultants, manager is most suitable for them. types of providers of fiduciary or adds Hendriks, have a role to play They will not only analyse the Outlook similar services will also broaden in educating the market about investment side, but also service The clearest way to view fiduciary as consultants and multi-managers the appropriate level of fees for an and the culture.” management is perhaps to look continue to develop and provide appropriate level of service. at it as one of several answers their own products. “As large sums are invested at He also notes potential conflicts to the complex of problems At the same time, successful specific addresses inefficiencies of interest for consultants outlined earlier in this article: providers will evolve to enhance will disappear, and closet indexing where they operate in so-called increasing regulation, governance and refine their offering. And new will be the result at active fees,” implemented consulting, which requirements and investment entrants to the market in the form notes Bosch. This is not in the involves a greater degree of complexity. of PGGM and APG Investments interest of participants.” decision making power for the That trend is likely to continue (formerly ABP Investments) adviser in manager selection both in the Netherlands and else- will add considerable asset Role of consultants and portfolio implementation. where, so even though fiduciary management, manager selection Market observers note that However, consultants have gone management may not see many and risk management skill to the consultants were lukewarm about to lengths to explain the Chinese more years of exponential growth Dutch market and possibly also fiduciary management in the walls that they have in place to in the Netherlands, there are good abroad. Fiduciary management in summary l Fiduciary management does not involve the complete outsourcing of investment responsibility. Rather, it is about a new way of organis- ing and devolving some aspects of fiduciary responsibility. l The board or trustees of a pension fund should in always retain responsibility for setting the strategic investment goals for the port- folio. On an on-going basis, the board should focus on directing and governing the fund relative to these strategic goals. l Institutional investors already outsource some aspects of their fidu- ciary responsibility when they work with external investment manag- ers – an external manager should always act in the fiduciary interest of an institutional investor in any case. l Fiduciary management is not a packaged multi manager solution. It involves a high level of customisation to the individual investor’s needs. l The fiduciary manager works in partnership with the board of the pension fund, and its investment committee or its in-house team, on an on-going basis. The investor should expect a high level of contact with the fiduciary manager. l Some fiduciary managers outsource all investment mandates to third parties on a ‘best of breed’ basis; others will want to manage some assets themselves. Opinions differ as to the various options available in the market and an investor should evaluate the different approaches care- fully to ensure their needs and goals are catered for. l Pension funds and other institutional investors must carefully evalu- ate the service level agreement to ensure that they receive the right mix of active management and service in respect of the fee paid. l Some fiduciary managers can also cater for the partial outsourcing of one part of the portfolio, such as alternatives, where the due diligence and manager selection tasks may be too onerous for the investor. l Consultants are an important party, in the selection and evaluation of fiduciary managers and to advise on an on-going basis. 4 JUNE 2008 IPE
  7. 7. FIDUCIARY MANAGEMENT The third phase sponsor; those asset classes, possibly q Constructing an efficient supplemented by active and investment portfolio; dynamic management. The q Selecting asset managers; fiduciary achieves a large degree q Monitoring those managers; of diversification and manages q Reporting on the investment risks using state-of-the-art models Fiduciary management is the next stage process. for dealing with correlations that are different and vary over time. in asset management, says Anton van Advice A fiduciary offers a pension The fiduciary brings expertise to this complicated issue and Nunen. He outlines the concept, reviews fund a combination of expertise a holistic approach, wherein and a commitment to the the plan sponsor can still the Dutch experience and assesses its overall management of the discern its target within the potential for other countries plan, including asset liability studies, balancing risk and detailed calculations. After all, the decision as to what I return considerations. It also asset classes are to be, and to t is occasionally suggested evidence shows, that the question diversifies as much as is efficient what degree, is a decision that that fiduciary management is ‘why?’ has changed into the and generally educates the cannot be delegated, even if not very different from other questions ‘what?’, ‘how?’ and plan’s trustees and the sponsor’s the fund wanted to. To a large models such as multi-man- ‘who?’. Fiduciary management staff about a range of issues extent, these strategic decisions agement and implemented has become accepted as confronting them. The fiduciary determine the outcome of the consulting. However, given the a necessary part of good may not necessarily carry investment process and with that breadth of tasks of a fiduciary, it governance.” out the asset liability studies, the degree of indexation possible, is evident that fiduciary manage- The evolution of institutional although this is a possible service. and the level of contributions ment is more than just multi-man- investing has seen a move However, the manager can needed. agement. from a balanced manager as provide a specialist with critical This is a very important In fiduciary management, the the sole provider of investment market information, evaluate the exercise as, with the introduction construction of an efficient management to employing a study’s outcome and generate of more stringent funding portfolio, producing maximum whole range of asset managers, ideas about its the investment regulations and of IFRS, more returns given the risk budget, is each responsible for a small part side by offering input on asset and more pension funds tend more crucial for future returns of the overall portfolio, in an classes, additional data about to match assets and liabilities. and the risk profile. Multi- attempt to grasp the benefits of correlations between investments, Adherence to regulatory demands management can be part of diversification. and so on. is increasingly preferable the this structure, but is not per se. The first concept is based on More importantly, the fiduciary advantages of diversification and Given a pension fund board’s the fallacy that one manager can can help the fund decide what the prospect of generating higher preferences and given the be the best in all relevant asset exactly to do with the outcome returns. Adequate calculations liabilities and accompanying risk classes, and suffers from a low of the study. The board, which to achieve a combination of budget, a multi-manager portfolio degree of diversification. The in general will have a limited high aspirations and reasonable can be – and most of the time second has the disadvantage that knowledge of and experience risk can avoid sacrificing the will indeed be – the optimal expertise lies with the people in investments, should choose wellbeing of pensioners and ease outcome of the calculations. who have no responsibility a risk budget that is stated of mind of the fund’s decision Implemented consulting may for the whole portfolio, while in terms with which it is makers. be able to approach the fiduciary those with responsibility are not familiar, such as a maximum concept quite closely, but it experts. probability of having a certain Selecting and overseeing should be devised differently That meant investors made amount of underfunding. The Once the strategy has been to the way it is now. The extensive use of consultants. fiduciary should then be able determined, specialist managers consultant should be more or But they too have only a limited to translate this neutral budget have to be selected and mandated less embedded in the fund, not purview. Moreover, overall risk into investment terms, guiding to invest the funds. The fiduciary giving his thoughts and advice management is difficult, not to the choice of asset classes, their should know all the managers on a limited number of days per say absent, as there is no integral benchmarks and the level available for each asset class or year. He should exhibit skills responsibility delegated to these of active policy. investment category, should and experience in different areas consultants. The result was an be able to employ them (while such as the translation of the ineffective organisation lacking Portfolio entry could be difficult or ALM outcome into investment the preparation needed for good construction impossible for the fund itself), terms, portfolio construction, strategic decision making. Once a fund has come and should have the data manager selection and the to grips with the broad necessary to predict interpretation of portfolio results. Introducing the fiduciary issues associated with to a certain degree In short, he should show all the Avoiding the disadvantage of its approach to that the managers characteristics of a good fiduciary having just one manager while investing, it can show skill, except for the responsibility the retaining responsibility for the formulate the and, when fiduciary has in the execution. overall portfolio, of which parts specifics of its the fund has Fiduciary management, were run by specialists, has led to investment decided to therefore, is a management the introduction of the fiduciary approach. use active model in its own right and not manager. A portfolio is managers, a purified form of an existing Fiduciary management no longer an produce excess model. Perhaps the best advocate provides comprehensive risk aggregation returns above of this is Frank Russell’s director management, although a number of discrete, a defined of strategic advice, Don Ezra, of independent specialists run promising benchmark. who in an address to a Russell parts of the investment portfolio. investment Moreover, Investment Conference in It can oversee strategic decision ideas, it is a top- the fiduciary 2006 defined best practices in making and organise effective down construction can suggest pension management in a way governance. The fiduciary of assets among combinations of that makes them identical with manager provides five key a set of asset managers in some fiduciary management. He said: functions: classes, followed fields whereby the “The acceleration of multi- q Advising the board of the plan by sub-allocations combined risk is manager structures is evidence of within some of lower than that fiduciary management of the individual taking hold. Recent
  8. 8. FIDUCIARY MANAGEMENT managers involved. These benefits in financial markets and in the mechanisms and a more skilled could be a fit, while the other half of diversification, together with regulatory environment. array of managers should outweigh was not familiar with it. the lower fees the fiduciary is able extra costs. And the fiduciary’s This rather high number bodes to achieve on behalf of the client, Dutch experience purchasing power can reduce well for further success of the should improve the fund’s long- In less than five years, assets management fees to a certain fiduciary concept. Even more term revenue picture. under fiduciary management degree. astonishing was the finding that have increased from zero to more Still, there is the certainty of 70% of the larger pension funds Monitoring than €100bn. Pension funds, higher costs on the one hand, were contemplating fiduciary Once the portfolio is contracted both company and industry- next to the probability of higher management as the successor of and the managers mandated, the wide, insurance companies and returns on the other. This often their management models. One investment process can proceed. endowments have appreciated is an uneasy situation, especially would expect that the concept From day one, it is the task of the the theoretical considerations for Dutch institutions, accustomed would be more tempting for fiduciary to monitor the portfolio and hired Dutch, French and to low management fees. smaller funds that find the gap by measuring risk and return at US fiduciaries to put them into Performance-related fees would between the increasing complexity the level of the managers, the practice. Institutions, ranging seem to be a solution here. Making of the business and in-house (sub) portfolios and the overall from some €100m to €8bn, have the fiduciary fee to a large extent capabilities more problematic than portfolio level. entered the area, indicating that dependent on results makes it the larger ones. But interpretation is as important the concept as such not only easier for funds to pay for services. KPMG, which in the meantime as measuring, and for that enables smaller institutions to Positive experience has been is offering searches for fiduciaries adequate benchmarks are needed. incorporate the best approaches gained by linking fees to the on behalf of institutional The fiduciary’s task is to advise on in the market to investing, but realised information ratio instead clients, concludes that fiduciary benchmarks that extract the best appeals to the larger funds as well. of outperformance. In the former management is here to stay as results from asset managers and Experience shows that this new case, the fiduciary is rewarded it integrates, oversees and co- enable the fund to understand the approach has created important even if the outperformance is ordinates all the fund’s operations. results achieved. Absolute returns changes in several fields. less than it could have been in will enable the plan sponsor Investment policy has changed situations where markets do not Beyond the Netherlands to judge how the investment dramatically: more asset classes, reward risks as they should be It is highly probable that fiduciary process has contributed to the and within them different assets, rewarded. In that case it is good management will take hold set of specified goals. Both are used, and more managers are policy to allocate less risk in in other countries given that absolute and relative returns will employed to diversify further. the markets and the fiduciary financial regulations are becoming make it possible to compare the Discussions with asset liability is not punished for this sound increasingly strict and complex achievements to those of peers experts and asset managers have consideration. in nearly all developed countries, and will show whether or not become more complex, as have the All of these changes have and international financial risks taken have been rewarded. portfolios, especially in the field occurred in the Netherlands and reporting standards are putting The first aspect specifies the more of risk. And in that the fund is may be expected elsewhere. They a strain on funds worldwide. or less urgent need to improve supported by the investment skills hint at an institutional sector that International companies want to results; the second indicates the of the fiduciary. has gained in sophistication. diminish the impact of pension possibilities to do so. As the fiduciary fulfils a funds on their balance sheets and whole range of duties in a more Research by large consultants many want greater separation Reporting diversified portfolio, the age- Erik van Ockenburg, a principal from them. Greater responsibility Control by a pension fund’s board old question arises: who guards at McKinsey, told JP Morgan’s for funds and less interference is not easy without transparent the guardian. Consequently, Annual Dutch Pension Fund by the plan sponsor requires a reporting by the fiduciary. It the investment committee’s Seminar last year that fiduciary stronger governance structure, enables the sponsor to know role is often enhanced to cope management is stimulated both and fiduciary management is exactly what has been achieved in with these more sophisticated by the demand and supply sides. delivering just that. terms of return and risk and how investment policies concerning Demand is pushed by new, stricter And expectations of less these results relate to benchmarks, more assets, combinations of alpha regulations; the need for higher favourable investment possibilities peers and the fund’s goals. and beta products and extended returns than those generated by and future returns in all countries The reporting format should be calculations. The committee traditional investment vehicles are additional stimulating factors. according to the wishes of the should also support the board in and by higher standards in the Should they prove correct there is plan sponsor and also comply its judgment of the fiduciary’s use of risk management tools. additional need for better ways to with regulations. It should be at a value-added. The custodian can Where larger funds have no organise investment management. level that enables management to also play a role here, delivering the problems with regulation, search Therefore, it is probable that the read it and provide more in-depth data to calculate the improvements all markets for higher returns and Dutch example will find many information to allow specialists to in risk and return. use the most sophisticated tools, followers abroad. understand the intricacies of the Compared with the pre-fiduciary smaller funds with ambition find In the meantime some fiduciary results. Both should be based on phase, the custodian already has a solution in the employment of a contracts have been signed in data validated by an independent a more extended role because of fiduciary. Austria, Germany and Switzerland. custodian. the increased complexity of the On the supply side, pension The UK, which is also showing investment portfolio. The reality funds realise they can sell their interest in the concept, is a Education is that in some cases the existing internal management to third special case because of its existing The detailed alternatives offered, custodian has had to be replaced parties, enlarging their scope and phenomenon of fiduciary trustees. often based on complicated because of that. reaping the benefits of economies External advisers perform calculations, may require the plan Communication with the of scale. Asset managers try to additional duties to the more sponsor to receive some training. regulatory authorities is also copy the higher margin of retail familiar consultants as they are A pension fund board must deal different, as the enhanced business by extending service legally responsible for the fund’s with different parties pursuing professionalism of the fund, in to institutional clients. Loyalty, performance. This more extended their own agendas. Employees conjunction with its fiduciary notoriously low at institutions, is position is an extra reason for want secure assets but also higher manager, creates more room thereby increased as well. considering the introduction of benefits. The plan sponsor wants for dialogue instead of one-way In a 2007 survey of some 100 a fiduciary manager. Through low risk in the fund’s balance directives. major Dutch corporate pension his experience and expertise, the sheet but also low contributions. Last there is a change in the level funds, KPMG found that 58% fiduciary manager is well placed Investment managers claim to and structure of costs. A fiduciary saw governance – with its aspects to take over some responsibilities generate high returns and low risk. fee adds an extra layer of costs in of risk management, expertise, that the fiduciaries may be happy Advisers claim to have solutions addition to already existing asset regulation and continuity – as to share. for all kind of problems. management fees. When the fund the most important issue over An inhibiting factor may be the A fiduciary can educate the chooses to employ a large degree the next few years. To cope with name of the concept: a fiduciary relevant executives so that they of active management, these fees requirements in these respects, manager next to a fiduciary is can make the right decisions on all will probably rise too; best-in-class fiduciary management can be an not a very efficient way to define these issues. It can also inform the managers often demand higher alternative to mergers, liquidation responsibilities. board on questions that go beyond remuneration. or seeking shelter in an industry- Anton van Nunen is the author of those of day-to-day business, But increasingly, sophisticated wide scheme. Indeed some 50% of ‘Fiduciary Management: Blueprint such as trends and developments portfolios with diversifying the sample indicated this concept for Pension Fund Excellence’ 6 JUNE 2008 IPE
  9. 9. FIDUCIARY MANAGEMENT Case study: Pensioenfonds Vervoer P ensioenfonds Vervoer, wanted to receive an unbiased 2007 as an example. “We with GSAM on an almost daily the €8bn Dutch industry- view,” he says. received a phonecall about basis. “In addition, we receive wide pension fund for “We started the selection the opportunities in the credit monthly and quarterly reports private transport workers, process in a fairly conventional markets, created by the extreme and also visit the managers with was one of the first funds way through IPE-Quest, where we volatility at the time. From GSAM. It is, after all, a people to wholeheartedly adopt the con- posted a list of questions to gauge agreeing the parameters of the business and it is vital to get to cept of fiduciary management in an initial reaction, after which we investments, the mandate was know the people who actually 2006. sent out an RFP.” implemented within one week.” manage our assets,” Groenendijk Patrick Groenendijk, CIO of He says it became apparent On a practical level Groenendijk says. Pensioenfonds Vervoer, explains that many of the companies and his colleague communicate Apart from getting to know the strategic thinking behind responding claimed to be hiring Goldman Sachs Asset able to manage the assets as Management as its fiduciary a fiduciary manager, but few Pensioenfonds Vervoer at a glance manager, rather than remain actually fulfilled the criteria. Full name: Stichting Pensioenfonds Vervoer with a balanced mandate at FC “In particular, many of the Assets: €8bn Fiduciary manager: Goldman Sachs Asset Management Management: “The decision was balanced managers called Sub funds: PF Freight Transport (long distance freight taken at board level in 2005 for themselves fiduciary managers and mobile crane hire sectors) several reasons,” he says. but they would use their own PF Personal Transport (taxi and bus “The fund was already 100% asset management capabilities, transport sectors) outsourced to an insurer, and and what we wanted was true Early Retirement Fund Freight Transport had no internal organisation manager diversification.” Participants: 155,000 or investment He points out Deferred participants: 370,000 professionals. that in 2005 there Pensioners: 40,000 Secondly, the were around six Employers: 8,600 Dutch regulator, or seven managers Management DNB, changed the who were truly regulatory framework capable of fiduciary so that if you management. outsourced your After a beauty Pension advisory committee Participants’ council pension fund you parade, Vervoer would be required decided on GSAM. to have professional “The degree to which Investment advisory committee Complaints committee monitoring GSAM could offer capabilities in- bespoke or tailor- house, ie an internal made solutions Actuary Accountant organisation. And which were relevant Groenendijk: ‘fiduciary thirdly, performance to our specific fund, natural solution’ was an issue where rather than a one- the assets were managed in a size-fits-all formula, was crucial,” Offices of the directors balanced mandate. Groenendijk says. In addition, Groenendijk says because of he notes, GSAM had already set the size of the fund and the lack up a specific team for the task of of an internal organisation a picking external managers that fit fiduciary management solution Vervoer’s needs. was a natural choice. The in- Vervoer’s board continues to set house investment team was set the strategic investment policy PVF Nederland N.V. Fiduciary investment manager Custodian up in 2005 and now consists on an annual basis with advice of Groenendijk and a colleague from the in-house investment working part-time. team, which is then implemented “At the time we hired an by GSAM. independent consultant, with a Groenendijk says asset stress on independence because allocation is also changed once AM AM AM AM AM we were aware that a lot of a year but there is flexibility investment consultants offer to act more quickly, should Source: Pensioenfonds Vervoer fiduciary-type solutions and we the need arise. He cites August European fiduciary mandates 2002-08 Sponsor Amount Date Winner Selection reasons Previous Consultant SBVD ( Neths ) €125m (1) May 2008 FC Investments n/s n/s n/s Bertelsmann ( Germany ) €2.7bn (1) April 2008 n/s n/s n/s n/s Bpf PSL ( Neths ) €250 (1) April 2008 Blue Sky Group n/s n/s Watson Wyatt Merchant Navy ( Neths ) €3.2bn (1) March 2008 Mn Services Quality of services/understanding fund’s nature n/s n/s Wheel Tyre Scheme ( Neths ) €150 (1) February 2008 Mn Services n/s n/s n/s TVM Verzekeringen ( Neths ) €450 (1) February 2008 ING/AZL International exposure n/s KPMG Randstad ( Neths ) €390 (1) December 2007 Kempen Anglo-Saxon quality/Dutch mentality n/s Avida Intl Atradius ( Neths ) €180 (1) December 2007 Fortis Investments LDI funds n/s n/s TNO ( Netherlans ) €2bn (1) September 2007 BlackRock Track record in FI, securities LDI n/s Avida Intl PME ( Neths ) €21bn (1) May 2007 Mn Services High returns, low admin, flexible services n/s n/s SBZ ( Neths ) €2.3bn (1) February 2007 ABN Amro Russell n/s n/s Avida Intl KPN ( Neths ) €4.5 (1) January 2007 TKP Professional management consultancy n/s n/s Aon Group ( Neths ) €250 (1) January 2007 TKP Greater flexibility at lower cost n/s n/s Zorgverzekeraar CZ ( Neths ) €700m January 2007 Goldman Sachs AM Good returns within the risk framework n/s n/s Cargil ( Neths ) €261(1) December 2006 Mn Services n/s n/s Mercer Inv Cons Vervoer ( Neths ) (2) n/s September 2006 Mcube AlphaEngine n/s n/s n/s Campina ( Neths ) €1bn (1) August 2006 Goldman Sachs AM Risk budgeting, customer service, long-term policy Interpolis/AZL Robeco Anton van Nunen Stichting Pensioenfonds OCE ( Neths ) €750m June 2006 Goldman Sachs AM n/s n/s n/s Pensionfonds Vervoer ( Neths ) €5.4bn May 2006 Goldman Sachs AM More diversification FC Goris Partners Vopak ( Neths ) €210m February 2006 Mn Services n/s n/s n/s Campina ( Neths ) €350m January 2005 Goldman Sachs AM n/s n/s n/s Zorgverzerkeraar VGZ ( Neths ) €1bn (1) April 2002 Goldman Sachs AM Clients benefits from good management n/s n/s Notes: (1) Fund value. (2) fiduciary oversight; n/s = not stated. Summary data based on information in the public domain. Source: IPE IPE JUNE 2008 7
  10. 10. FIDUCIARY MANAGEMENT the investment process and instance, did not deliver what was make the portfolio work more focus on risk. Increased awareness people of the underlying expected in terms of performance. efficiently than it has done so of risk has led us to currency mangers, Groenendijk has “Last year was difficult for many far. “Markets are not exactly hedging and a closer look at the ongoing discussions with GSAM active managers and the same is helping our fund to grow at the fund’s interest rate risk versus about topics such as responsible true for Vervoer.” moment but because our member liabilities. We recognise that we investing, new additional asset On terminating underperform- base is young we do have more are more than just an investment classes and operational issues. ing managers, Groenendijk says contributions than pension manager, and as a pension fund Those criticising the fiduciary this is in the hands of GSAM payments which are going to need to look after our liabilities approach often cite manager because the firm is paid according grow for some time.” and invest in order to meet those reporting as a problem, but to performance. “Of course we Vervoer invests a third in liabilities. Groenendijk disagrees. “We have also have a dialogue with the equities, 47% in fixed income “This has been stimulated by not experienced any problems managers and would discuss and the remainder in alternatives the creation of the new financial with reporting. GSAM has built underperformance in our regular such as real estate, GTAA, assessment framework in the a solid business and the Chinese meetings,” he says. commodities and hedge funds. Netherlands, the FTK, which walls prevent them from using What could work better? The outperformance target is 1% came into force at the beginning the material they get from Groenendijk cites speed: “GSAM per year on a long-term basis, of 2007. We think it is a very external asset managers. If they is a large US entity and it is very with a tracking error budget of positive development that the were even to use this material compliance and legal-driven, 200 bps. implementation of ALM – which once to gain any competitive which can slow things down. Groenendijk says that with was already well known in theory advantage, the reputational risk On the other hand, with the hindsight, “I don’t think we 10 years ago – has now been taken would be so great that that would current regulatory environment would have done things much seriously. wipe out any potential advantage we do need someone with the differently except to take manager “Furthermore, over the last that the information could have compliance and legal capabilities diversification much more decade, our portfolio has become given them,” he says. that GSAM offers,” he notes. seriously and set up the executive less reliant on equity markets He admits that in a project of Overall Groenendijk is happy office earlier. and we have diversified into this size there is always room with the service offered by GSAM, “In addition, today we have a alternatives.” for improvement, and 2007, for noting that the main goal is the much greater awareness of and Pirkko Juntunen Case study: MITT pension fund T he route of the €950m you should not make such a very good relationship with the its investment portfolio and to Dutch industry pension investment choices by yourself Mn Services account manager, achieve a degree of innovation. fund for the fashion, because you do not have enough which he values. The fund has started investing in interior, carpet and tex- expertise in-house,” says commodities, has allocated tile industries (MITT) Hasselman. He argues such Pensioenfonds MITT at a glance 1% to infrastructure, and was relatively uncomplicated. The a lack of expertise does not has moved into high yield new fund inherited the concept apply only to MITT but Full name: Stichting Bedrijfstak- bonds. following its inception in 2006 also to other funds, since pensioenfonds Mode- Most recently, the scheme after the fund for the clothing the management of Dutch Interieur-, Tapijt- en has invested in cheap bank industry, since early 2005 with pension schemes is still split Textielindustrie loans. “As a consequence Mn Services, and the textile fund, between employers’ and Assets: €950m of the sub-prime crisis, Fiduciary Manager: Mn Services at the time with AZL, merged to employees’ representatives. banks have got into Participants: 13,500 form MITT. “These are of course people Deferred participants: 96,000 trouble. The spread on that “The clothing fund had just who have some knowledge of Pensioners: 36,000 sort of loan has increased completed a selection process investments, but they are no Employers: 900 enormously; it has a much in 2004, with a beauty parade investment experts,” he adds. Source: MITT higher yield and you can of five managers and they Instead, the board’s reasonably reduce your eventually chose Mn Services,” primary responsibility, Transparency is also a risk.” This idea was proposed by says Jan Hasselman, board Hasselman finds, is to select consequence of the fund’s own the fiduciary manager, and the member and the chairman of the the right asset manager and involvement, says Hasselman: fund started investing within fund’s investment committee. to supervise the investment “As the investment committee four weeks. “Since the appointment was still management. Hence, there is you are responsible for the Responsible investing is one very new, we decided not to go no in-house investment team, investment results.” All things very distinct area in which the through the process again, and although MITT’s investment being equal, it is the committee’s fund has gone it alone – earlier only had to make a decision commission meets together with job to obtain the information it this year, MITT signed the between Mn and AZL.” Mn Services once every quarter. needs. UN’s Principles of Responsible The fund chose Mn Services, At these meetings Even though the Investing (PRI). “Within the which is larger and has more MITT is assisted by fund is content about textile fund we already had assets under management than Watson Wyatt: “We the co-operation, it ING screening our portfolio AZL, in the belief that the have an investment finds the Mn Services’ for us, and we had strategies manager would be able to deliver consultant so that performance has to make our investments more a broader range of services we have enough sometimes been sustainable. Mn Services did not because of its size. Secondly, expertise to be disappointing. “The have that service, so we decided, MITT was attracted by Mn’s able to give some benchmarks are not with the support of Mn Services, broader range of investment level of resistance,” always beaten. You to sign the PRI.” categories. comments look for an active Overall though, MITT’s The fiduciary manager now Hasselman. investment manager, investment mix has become manages almost all aspects of the MITT is happy and the goal within more refined since the fiduciary fund’s investment management, about the level of a certain bandwidth mandate. The fund currently including strategic and tactical communication of risk is to beat invests around 25% of its assets advice as well as operational with its fiduciary the benchmark. in equities, which are split up in investment decisions. MITT manager: “Once Hasselman: ‘committee That doesn’t always US, Europe, Asia and emerging prefers this outsourcing model every month we responsible for results’ happen.” On the markets. Another 50% is since it finds itself to have greater receive a report of around five other hand, admits Hasselman, invested in fixed income, with a flexibility and agility to make pages, giving us an overview of one should look at such proportion now allocated to high decisions now that there are no what is going on, while every developments over a longer yield and bank loans. Lastly, more consultations with multiple quarter we receive an extensive period of time. there is a 25% allocation to managers. report, which is then discussed.” Despite the underperformance, commodities and real estate. “As a fund’s management, Hasselman adds that he also has MITT has been able to overhaul Carolyn Bandel 8 JUNE 2008 IPE