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REAL ASSETS SPOTLIGHT
CURRENT INFRASTRUCTURE ALLOCATION
As U. S. institutional sponsors ponder where they can (and should) allocate capital to
bridge funding gaps in the infrastructure class, many state and local governments are
struggling with anemic budgets, while the need to improve America’s infrastructure
grows more urgent. High barriers to entry may be associated with certain infrastructure
investments given the significant resources and due diligence needed to understand
the unique risks and liquidity profile of these long-term assets.
The American Society of Civil Engineers’ March 2013 assessment of the nation’s
infrastructure estimated that the U.S. requires $3.6 trillion in infrastructure investment to
bring conditions to relatively good standing by 2020. The estimated shortfall is currently
$1.6 trillion, or $201 billion annually. The report noted some of the economic inefficiencies
created by poor infrastructure: for example, 42% of America’s major highways are
It seems like a perfect match. Given current market conditions,
pension funds globally have been trawling for stable, long-term
assets; U.S. infrastructure is in dire need of long-term funding to
rebuild America. So heightened institutional investor interest in public
works opportunities to diversify their portfolios and generate economic
benefits for the public and private sectors should be a no-brainer,
correct? Apparently, not necessarily. Despite the ostensibly ideal
fit, commitments by investors to rebuild America’s roads, bridges,
waterways and utilities have so far been markedly thin.
congested, costing the economy $101
billion in wasted time and fuel annually.
Over the last two years, the average
global allocation to infrastructure by
institutional investors increased to 4.3%
from 3.3%, according to Preqin data. In
particular, public pension funds globally
(with aggregate AUM of $8.3 trillion) had
an average actual allocation of 2.9% of
assets to infrastructure investments, with
an average target allocation of 4.8%.
“Plans are looking for enhanced
returns, so they
are reducing their
allocation to fixed
income and increasing
their allocation to real
assets, which can
include infrastructure,”
said David
Rogers, founder of Caledon Capital
Management, a firm which formulates
infrastructure and private equity programs
for institutions. “Infrastructure assets can
generate average yields between 4-6%
long-term, depending on the asset.”
INVESTMENT STRIPES
For investors, certain projects, such as toll
roads and bridges may generate steady
long-term cash flows, which can assist
with liability-driven investing strategies
and provide duration hedges. For
example, in 2013, a team led by Kiewit
and Macquarie Group won a mandate
from the Port Authority of N.Y. and N.J.
to finance, design and build a $1.5 billion
replacement of the 85-year-old Goethals
Bridge. The financing comprised various
funding sources (equity, private activity
bonds and a Transportation and
Infrastructure Finance and Innovation
Act (TIFIA) loan). The Port Authority will
repay the consortium over 40 years, with
annual payments starting at about $60
million.
“One of the primary reasons why
Global Pension Funds’ Appetite
For U.S. Infrastructure Piquing
David Rogers
3.50%
4.50%
5.50%
6.50%
7.50%
8.50%
Series
Discount Curve
Source: Prequin

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| FALL 2014
people are investing in infrastructure
assets is because these assets are
operating in monopoly-like conditions,
they are providing essential services
to the functioning of the economy, so
therefore the cash flows tend to be very
resilient, even in times of economic
or broader financial market distress,”
said Darren Spencer, director and
client portfolio manager at Russell
Investments. “You’re investing in long-
duration assets where the leases or
concessions are typically 30-99 years,
and that is clearly a differentiating feature
relative to other assets in the portfolio.”
Some infrastructure investments have
their cash flows linked to inflation. These
returns will be correlated to real economic
growth and should produce stable
returns. Tolls related to the Indiana Toll
Road (ITR), for instance, are based on the
greater of CPI, the increase in GDP per
capita or 2%. ITR is operated by units of
Ferrovial and Macquarie Group, which
were granted a 75-year lease in 2006.
For larger funds that have the
economies of scale to invest directly into
projects, such investments may face
relatively little competition, making them
more compelling. “When [the Ontario
Municipal Employees Retirement
System (OMERS)] and [the Ontario
Teachers’ Pension Plan (OTPP)] started
out, there was less competition,” said
Caledon’s Rogers, who was a senior
v.p. and team leader of OMERS’ private
equity team from 2001-2006. “A lot of the
sovereign wealth funds weren’t ready then
to invest in infrastructure. Initially, the large
Canadian funds targeted 12-14% returns
on larger assets. Now you will often find
returns around 10% being attractive in
markets like Australia, Western Europe
and North America, because of the
competition.”
IT’S THE ECONOMY…
The poor state of America’s infrastructure
is costing the nation billions of dollars.
As the population grows, the need
to repair the nation’s bridges and
highways will only increase. Any boost
in private investment in infrastructure
should stimulate the economy, including
the creation of jobs. Infrastructure
jobs account for about 11% of the
nation’s workforce, according to A
New Economic Vision for America’s
Infrastructure, a report published in May
by the Brookings Institution and KKR.
According to the report, “the United
States should spend at least an additional
$150 billion a year on infrastructure
through 2020 to meet its needs. This
investment is expected to add about
1.5 percent to annual GDP and create
at least 1.8 million
jobs.” An improved
economy could also
prompt the Federal
Reserve Bank to
raise rates, reducing
measured liabilities.
Pension funds
internationally, particularly in Australia
and Canada, have been investing in
infrastructure for decades. Canada’s
OMERS and Australia’s AustralianSuper
both reported investments in unlisted
infrastructure of more than 10% of
Geoffrey Yarema
464
574
428
430
577
588
642
618
437
454
344
426 422
458
386
149
0
50
100
150
200
250
300
350
400
450
500
0
50
100
150
200
250
300
350
400
450
500
2007 2008 2009 2010 2011 2012 2013 2014 YTD
AggregateDealValue($bn)
No.ofDeals
Fig. 2: Number and Aggregate Value of Infrastructure Deals
Completed by Institutional/Trade Investors
Investors Globally, 2007 - 2014 YTD
No. of Deals Reported Aggregate
Deal Value ($bn)
Estimated Aggregate
Deal Value ($bn)
6.9%
6.5%
3.4%
2.9% 2.9% 3.0%
2.2%
8.4%
7.8%
6.8%
5.1%
4.8%
4.0%
2.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Superannuation
Schemes
Asset
Managers
Endowment
Plans
Public
Pension Funds
Private
Sector
Pension Funds
Insurance
Companies
Foundations
AllocationtoInfrastructure(%ofAUM)
Fig. 1: Average Current and Target Allocations to Infrastructure
by Investor Type
Current Allocation
to Infrastructure
Target Allocation
to Infrastructure
Source: Prequin
Source: Prequin

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FALL 2014 |
plan assets. OMERS’ 2013 annual
report reflected a 12.4% return from
infrastructure assets, exceeding the
benchmark return of 9%.
PUBLIC-PRIVATE PARTNERSHIPS
This level of success can partly be
attributed to having a well-defined
regulatory framework for investments in
public infrastructure. Both Australia and
Canada have mature Public-Private-
Partnership (PPP) markets. PPPs enable
private enterprises to invest in public
assets through an infrastructure fund
and/or directly in a project. PPPs are
a risk-transfer mechanism, where the
risk of designing, building, operating
and financing projects, for example,
is transferred to the private sector.
Generally, the private sector realizes
a return when the assets perform
according to contractual obligations
and the project is available for use.
“If you optimize a variety of variables,
academic analyses and government
audits suggest somewhere between
20-35% in cost savings can be captured
over the life cycle of a [PPP] project,”
asserted Geoffrey Yarema, a partner at
Nossaman LLP, a Los Angeles-based
law firm that advises public agencies on
delivering mega-infrastructure. “That’s
equivalent to, and better than, raising 20-
35% in additional funding.”
PPP is a financing not a funding tool.
Ultimately, investors expect a return
on their investments. “There is a huge
difference between funding and finance,”
Yarema said. “We have a desperate
need for funding, but pension funds
aren’t providing that. They want to invest
debt and equity that will be repaid from
a source of funding.” When comparing
funds with AUM of more than $10 billion,
only 25% of U.S. plans directly invest in
infrastructure, versus 76% of Canadian
plans, according to recent Preqin data.
PPP legislation in the United States
is still in its nascent stages. While 33
states have passed PPP
transportation related
legislation, most bills expire
in a few years. Further, the
scope of PPP mandates
needs to extend beyond
transportation-related
projects. Going forward,
tapping the bond market
may be challenging and
expensive, as some
government entities face
budget constraints, weaker
credit ratings and debt
ceilings. Similarly, raising taxes may not
be politically viable, prompting officials to
search for alternative means of financing.
“[Pension funds] can inject private equity
into P3 projects, taking risk the municipal
bond markets are unwilling to take and
as a result advancing more funds for
construction out of a given revenue
stream,” Yarema said. “When combined
with lifecycle cost efficiencies, that’s a
major part of the value proposition in this
country for P3s.”
BENCHMARKS, DEFINITIONS,
CLASSIFICATIONS
There is little data on overall performance,
making it difficult to benchmark
infrastructure investments. “There really
is no consistent or appropriate approach
41%
28%
11%
8%
7%
5%
Fig. 3: Breakdown of Direct Infrastructure Deals
Completed by Institutional/Trade Investors
Globally by Region, 2012 - 2014 YTD
Europe
North America
Asia
Latin America
Australasia
Other
38%
18%
16%
14%
11%
3%
Fig. 4: Breakdown of Direct Infrastructure Deals
Completed by Institutional/Trade Investors
Globally by Industry, 2012 - 2014 YTD
Renewable Energy
Utilities
Transport
Energy
Social
Other
Source: Prequin
If you optimize a variety of variables, academic analyses and government
audits suggest somewhere between 20-35% in cost savings can be captured
over the life cycle of a [PPP] project,” asserted Geoffrey Yarema, a partner
at Nossaman LLP, a Los Angeles-based law firm that advises public
agencies on delivering mega-infrastructure. “That’s equivalent to, and
better than, raising 20-35% in additional funding.
(continued on page 30)

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Amrita Sareen-Tak is a consultant at JCRA Financial, a financial risk management firm. Prior to joining JCRA, she spent 11-plus
years at HSBC, primarily within the bank’s capital markets group.
to benchmarking that can be
used by all investors across the
Infrastructure asset class, as it
is such a nascent asset class
compared to private equity or
real estate,” said Liz Jamieson,
a senior associate at Caledon.
“The diversity in the benchmarking
approaches is partially a product of
varying risk/return expectations across
institutions, but the most common
approach is probably an inflation-
linked benchmark.” OTPP, for example,
benchmarks infrastructure performance
based on local CPI + 4% + country risk
premium, according to its 2013 annual
report.
Investors interested in investing in
U.S. public sector assets face other
challenges. The standardization of
definitions and classifications is at best
murky. There is no central authority to
facilitate information regarding funding
needs. And the potential
negative publicity associated
with “public investments”
may deter funds from making
a commitment (i.e. Alaska’s
emblematic “Bridge to
Nowhere”).
Given these challenges,
most funds have focused on international
assets. Chris Taylor, executive director
of the West Coast Infrastructure
Exchange (WCX), noted the irony of
public funds being spent to strengthen
economies overseas. Ideally, fiduciary
managers would invest domestically,
hitting their risk/return targets while
creating jobs and strengthening their
own economy, added Taylor added.
The WCX is a partnership between
California, Oregon, Washington and
British Columbia to “develop innovative
new methods to finance and facilitate
development of the infrastructure needed
to improve the region’s economic
competitiveness.” according to its
website.
But select pension funds
are realizing the benefits of
investing in public works. Firm
such as Caledon have been
mandated by small/mid-sized
pension funds to advise and
develop infrastructure programs.
“[Caledon] looks to help groups on a
separate account basis to access funds
and co-investments that they may not
otherwise be able to and emphasizes that
the direct investment model is no longer
reserved solely for the larger or mega
groups,” Jamieson said.
At times, Caledon may group clients
together to access direct investments
where the client otherwise may not
have the resources or capital to invest
on a stand-alone basis. “On a recent
opportunity in Australia, we represented
several of our clients in pursuing a large
asset that the clients could not pursue
on their own,” said Rogers. “Either they
could not write a big enough
check or they didn’t have the
internal team, so we enabled
that opportunity by performing
the due diligence.”
U.S. state and local
governments are also
considering the benefits of
alternative financing sources, as
traditional funding channels may not meet
future needs. These needs will likely drive
changes to the regulatory framework
and increase PPP adoption. Created in
2012, the formation of the WCX reflects a
proactive approach to encourage private
sector involvement in public works.
“Oregon’s infrastructure challenges are
immense, and solving them demands
innovative solutions,” said Ted Wheeler,
Oregon’s state treasurer. “To build critical
projects, we need new models that tap
into the expertise of the private sector,
while also protecting tax dollars and
preserving public ownership.”
The WCX is considering pooling
investments in order to make
opportunities more attractive for investors.
“Mega projects like the traditional
international P3s that are half a billion
and up are the minority of the projects
that we need to build,” said WCX’s Taylor.
“We need to figure out a way to address
the smaller projects, and that goes to
reducing transaction costs and bundling
projects.” The WCX has a number of
projects in the pipeline including the
Multnomah County Courthouse and a
water storage project, which involves both
Oregon and Washington. At the Clinton
Global Initiative this past June, Maryland
Gov. Martin O’Malley announced his
intention to pursue the Mid-Atlantic
Infrastructure Exchange, to address
infrastructure needs in the National
Capital Region and the Mid-Atlantic. The
idea of the exchange seems to mirror
the WCX as a central point connecting
government bodies with the private sector
to tackle regional infrastructure demands.
Given local governments may have
access to lower costs of funding, Taylor
encouraged investors to consider
investment vehicles that are competitive
and provide more direct exposure to U.S.
infrastructure. “Look at models where
you can invest directly, invest for the long
term or band together with other like-
minded investors to lower transaction
costs. I think it is more long-term, direct
investing that gets you there.”
Authorities have slowly made progress
in encouraging private investment in
infrastructure. Undoubtedly, a stronger
infrastructure will fuel efficiencies within
the economy, create opportunities and
stimulate growth. State and local officials,
however, need to do much more to foster
the relationship between pension funds
and infrastructure investment. The truth,
though, is that until pension funds are
more incentivized to actively invest in
rebuilding America, the two may flirt and
flirt but rarely will they spend more time
together.
Chris Taylor
Liz Jamieson
(continued from page 28)

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GMMQ WINTER 2015 19
SPOTLIGHT ON:
Latin America
Not since the passage of the North American Free Trade
Agreement (NAFTA) in the early 1990s has there been
so much buzz regarding Mexico and its potential rise as an
economic force in the global markets. Since the election of
President Enrique Peña Nieto in late 2012, there have been 10
major structural reforms passed by the government, compared
to five in the previous 20 years. The new policies span various
sectors, including telecommunications, education and finance.
And some of the reforms, particularly the latest energy reform
that passed in August, seek to encourage foreign and private
investment into Mexico in the coming years.
A key highlight of the energy reform includes the
elimination of monopolistic conditions for state-owned
Petróleos Mexicanos (PEMEX) and the Comisión Federal
de Electricidad (FTE), the state-owned electric utility. For
the first time in 76 years, private companies will be allowed to
participate in the oil and gas sectors, including the extraction,
exploration and production of oil. Within the power sector,
private investors will now be able to partake in the generation
and sale of power.
Mexico is the the fourth-largest economy in the Americas.
According International Business Times, the nation just replaced
Brazil as the top choice of investors looking to enter Latin
American markets, thanks to steady economic growth, falling
labor costs and recent reforms in the financial and banking
sectors. The International Monetary Fund forecasts Mexico’s
growth at 2.4% for 2014 and 3.5% for next year (it grew by 1.1%
in 2013); Brazil, by contrast, is expected to expand by 0.3% this
year and 0.6% for in 2015.
According to Boston Consulting Group’s (BCG) April 2014
report titled The Promise of Mexico’s Energy Reforms, Mexico’s
untapped natural resources, including oil reserves and shale
deposits, is an appealing market for exploration and production.
The government’s reforms are expected to increase Mexico’s oil
production by 40% by 2025. Further, the government is also
targeting Mexican companies to meet 35% of their energy needs
from non-fossil fuels by 2024.
PRIVATE INVESTMENTS
The implementation of a regulatory regime more favorable
to private investments, coupled with an underdeveloped
infrastructure and Mexico’s untapped natural resources
represents a unique opportunity for investors, several observers
believe. “The energy reforms seek to create a regulatory
and legal environment more conducive to foreign direct
investment,” BCG’s report states. “Although commercial and
economic impacts may not be fully evident until 2016, these
reforms will grant a first-mover advantage to those who can
mobilize quickly.” In 2013, Mexico saw a record of $35 billion
in foreign direct investments, a 178% increase from 2012.
The Mexican government expects foreign direct investments
of around $350 billion over the next five years to reinvigorate
energy production, according to EY’s 2014 report, titled
“Mexico’s Emerging Infrastructure Opportunity.”
“With the energy reform, there will
be multiple opportunities opening up in
the years to come as the specific contract
characteristics for private and international
participants become clear,” asserted
Alejandro Rodriguez, a director at New
York-based PineBridge Investments.
PineBridge is global asset manager
with $70 billion-plus in assets under
management. “Within the energy and infrastructure space,
we look for equity-like returns from managers,” Rodriguez
added. “Generally, our return expectation on energy
infrastructure investments ranges from
18% to 25%.”
Given infrastructure investment
opportunities elsewhere, returns need
to be competitive, noted Joe Amador,
a managing director at Houston-based
energy investment and merchant bank,
Tudor Pickering Holt & Co. (TPHCO).
“Investors have a limited pool of funds and, in general, are
trying to maximize their risk-weighted returns. For global
investors, projects in Mexico will be competing against
options to invest in the U.S. or in other countries,” Amador
said. “As such, they will be looking for returns in Mexico
commensurate with the perceived risks. Historically, energy-
Capital Call
Will Mexico’s Latest Structural Reforms Lure Foreign Energy Investors?
Joe Amador
Alejandro
Rodriguez

6. 20 NORTH AMERICA
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focused private equity firms have targeted portfolio rates of
return in the 20-30% range.”
RISKS TO CONSIDER
Mounting civil unrest and corruption concerns could slow the
flow of investment expected to flow into Mexico’s newly open
energy sector if not contained, analysts said. According to a
recent report in the International Business Times, oil-and-gas
companies and private investors are watching to see if protests
and police crackdowns escalate further, and if allegations of
government graft continue to emerge. “Corruption and safety
are the two most common concerns we hear. Personal safety is
a concern, particularly along the U.S. border, and investors are
going to have to get comfortable that the Mexican government is
taking steps to resolve this issue,” Amador added.
Rodriquez pointed to the very application and
implementation of the reforms as among the risks to be
considered. “Transparency, certainty of the rules and strong
corporate governance will foster better and larger investments,”
he said.
CHANGING INVESTOR PERCEPTIONS
Two years ago, the rhetoric of yet another politician calling
for change may have largely been ignored by investors. The
principal founders of Mexico-based private equity firm Ictineo
Infrastructure envisioned the potential impact of a new
presidential regime, however, and rolled up their sleeves and
got to work on exploring strategic opportunities. “We identified
that the market will be going through changes; politically, there
were going to be elections and reforms coming with the new
government,” said Robert Monturiol, a founding partner at
Ictineo. “We realized that there were not many Mexican private
equity firms specializing in sustainable infrastructure and given
the global trend towards [investing in] sustainability, we saw the
opportunity.” The fund will primarily invest in renewable energy,
water treatment, waste management and oil and gas, with the
expectation to generate annual returns of 20-30%.
Seventy percent of Ictineo’s capital will likely stem from
international investors, according to Bernardo Duarte, a
partner at Ictineo. “Given that the energy reform was passed
in August, we have seen an increase in interest by foreign
investors regarding our fund...foreign interest [has come]
from a variety of investors, including: pension funds, asset
managers, fund of funds, endowments, family offices from
mainly the U.S. and Canada but we have also seen interest
from investors based in Europe and the Emirates,” Duarte
said. While the Ictineo team would not comment on how
much capital has been raised thus far, or name those investors,
the team expects to reach their target of $400 million within
the next year.
The establishment of Mexico-based private equity firms
will likely be a trend in the coming years, according to Peter
Brown, a managing director in UBS’ Private Funds Group.
“There are relatively few established private equity firms in
Mexico focused on Mexico that are accessing foreign capital.
A lot of investors have a view that local expertise, relationships
and connections are things that are important, particularly from
the perspective of sourcing investment opportunities,” he said.
Brown emphasizes that some investors will weigh the prospect
of investing in locally managed funds focused solely on Mexico,
against investing in funds that have greater flexibility regarding
investment opportunities. “A focus, to a certain extent is local
knowledge versus diversification” he added.
Canadian-based Brookfield Asset Management, recently
opened an office in Mexico City and is reviewing possible
local infrastructure investments. The fund manager began
investing in Latin American infrastructure more than a
century ago and has dedicated infrastructure funds that
invest in countries such as Peru and Colombia. Brookfield
currently has approximately $200 billion in assets under
management. “Brookfield invests in infrastructure as part
of a strategy aimed at earning 12-15% returns over the long
term from owning and operating ‘real assets,’ which include
infrastructure, renewable power, property and private equity,”
said Andrew Willis, a firm spokesman.
ECONOMIC PROSPECTS
The sweeping reforms enacted across sectors could have a
positive impact on Mexico’s infrastructure and overall economy.
For example, the country’s fiscal reform is intended to boost tax
revenues by 2.5% of GDP by 2018, which could then fund other
areas such as education and infrastructure. “All these reforms
will create more jobs and increase the purchasing power of our
people, strengthen the domestic market and enhance economic
growth” according to a speech by President Nieto in August
2014. The government expects to generate 500,000 jobs within
the energy sector alone.
Earlier this year, Moody’s upgraded Mexico to single A,
making it one of two Latin American countries to be rated at
that level—the other country is Chile. The upgrade was driven
by the structural reforms approved last year, which Moody’s
expects will strengthen the country’s potential growth and fiscal
fundamentals, per the agency’s report.
The World Economic Forum’s Global Competitiveness Report
2013-2014 ranks Mexico 66th out of 148 countries regarding
the quality of its infrastructure. The Mexican government sees
the need for change and market participants see hope in their
promise. As for the founders of Ictineo, they are bullish on
Mexico’s growth potential and feel the momentum increasing.
“We are Mexican and 100% focused only on Mexico; we see
the opportunities, we understand the market, we target returns
of 20% because we know how to implement the right strategies
and recognize the impact of change.” Monturiol asserted.
—Amrita Sareen-Tak

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EUROPE
FALL 2014 |
Want More? Get the expanded eBook at iiSEARCHES.com/InvestorInsights
Fiduciary management was a nascent concept five years ago. Then, only a few early
adopters employed the strategy, according to Richard Dowell, head of clients at
Cardano, a U.K. investment advisory firm. “Those [early adopters], at least from the
perspective of Cardano clients, have done very well. Funding ratios have grown over the
period, whereas the average U.K. scheme will likely have seen deterioration.”
According to iiSEARCHES, 129 fiduciary mandates were awarded to various
advisors and consultants over the last four years, versus 112 mandates for the prior
four-year period. The increase in fiduciary mandates is driven by the idea that having
a greater focus on all facets of a fund versus focusing solely or primarily on traditional
asset management services will generate better performance overall. “It is important to
have the right people across the fields of investment management, risk management,
operations, legal, actuarial and also those who understand the back drop in which
trustees have to operate,” Dowell added.
iiSEARCHES’ data reflects a very broad definition of fiduciary mandates. Mandates
in this category have ranged from monitoring and implementing de-risking strategies
to mandates related to the operational management of assets. While fiduciary
management may have different implications across firms, the industry’s general
perception links fiduciary mandates to LDI-related strategies. Firms such as SEI,
however, think that fiduciary management offers a wider range of services beyond
LDI. A recent post on SEI’s web site states: “Fiduciary management does not equal
liability-driven investing.” SEI’s U.K. Business Development and Managing Director Ian
Love believes that while LDI is a key component of fiduciary management, healthier
funds with strong covenants do not necessarily need to focus solely on LDI strategies.
Funds with stronger funding ratios will likely have some leverage to focus on growth and
possibly take more investment risk. “It is not always about locking down the interest rate
and inflation risk,” Love said.
Trustees are beginning to realize that the traditional model of managing a scheme
and picking a manager for a 10- to 15-year horizon is not always the best solution.
Pension schemes can be sensitive to more short-term issues and certain techniques,
Fiduciary Management Growth Transforms European
Pension Market
By Amrita Sareen-Tak
such as dynamic asset allocation overlays
and hiring specialist managers, can help
improve growth, Love noted.
Pirelli’s pension fund has employed
Cardano as a fiduciary manager since
mid-2011. According to Pirelli’s Pension
Manager Tony Goddard, the fund started
exploring fiduciary managers when the
scheme realized the traditional consulting
model was dated and that most trustees
did not necessarily have the time to build
deep expertise in investment matters. “We
had a period before my involvement when
somebody said ‘you should be looking at
swaps rather than gilts.’ Then the trustee
took legal advice and then actuarial
advice…by the time they got themselves
in a position to where they were happy
to do something, the market had moved
away and they weren’t in a position to take
advantage of the idea.” So that, combined
with the dislike of the standard consulting
model, meant that the trustees and the
company were keen to move towards a
fiduciary mandate, he explained.
Goddard noted that while Pirelli was
searching for its fiduciary manager, the
scheme ran training courses in parallel
for trustees so they could increase their
investment knowledge in general and
fiduciary management in particular. The
As increased regulation and governance continue to impact global
financial markets, the number of fiduciary mandates—in which a
third-party provides front- and back-office services—awarded by
European pension funds has grown significantly. Trustees, particularly
in the U.K. and Netherlands, appear to be taking greater ownership
and a more hands-on approach to managing their funds. There is a
greater awareness by trustees of the importance of ensuring there
are dedicated professionals to advise on multiple aspects of a fund,
representing a shift from the traditional governance model that offers a
number of benefits, according to some industry practitioners, including
more time for the trustees to focus on areas that cannot be delegated
and better control over schemes in the pursuit of stronger funding ratios.
It is not always
about locking
down the
interest rate and
inflation risk.
—Ian Love, SEI
(continued on page 16)

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fiduciary manager selection process took Pirelli approximately
one year, with the company appointing consultant KPMG to help
pick a manager.
CONSULTANTS COMPETE WITH ASSET MANAGERS
While a majority of fiduciary mandates have been awarded to
consultants, asset management firms are also growing their
presence in the fiduciary management space. According
to KPMG’s 2013 Fiduciary Management U.K. Market Survey
released last November, 75% of the fully delegated fiduciary
market is managed by consultancies, though this represents an
approximate 5% reduction from a year ago. Consultancies have
dominated the fiduciary management space, largely due to their
deep relationships with asset owners, which allow them to cross-
sell to a scheme. As such, there is a perception in the industry
that there is an increasingly fine line between offering consulting
and advisory services to the same fund. Having a single firm
provide multiple services may limit a diversified investment
approach and may inadvertently create biases in terms of that
approach.
According to Dowell, “there is definitely a conflict of interest
if you are currently an advisor, and then advise your client
to move to fiduciary [services] without undertaking an open
market search.” Fee arrangements vary between funds and
managers. Not surprisingly, many arrangements include some
type of flat payment and then a larger fee tied to performance.
This arrangement is reflective of Pirelli’s current agreement with
Cardano. “If the advisor is not comfortable with performance
related fees, then how could the trustee get comfortable with
what the advisors claim they can deliver?” Goddard asked.
SIZE DOESN’T MATTER
KPMG’s 2013 Fiduciary Management U.K. Market Survey
also emphasizes that the U.K. fiduciary market continues to
grow at more than 20% per annum. Interestingly, the survey
noted that fiduciary management solutions are more common
for smaller pension schemes than larger ones in the defined
benefit space, with 91% of mandates being smaller than
GBP250 million (approximately USD415 million) in terms of
assets under management. Arguably, smaller sized funds
have limited resources and would have a greater need for a
fiduciary manager. Firms such as Cardano have seen increasing
interest by medium- and larger-sized schemes. “The concept of
accessing a full-time professional team managing assets against
liabilities looking to achieve better results applies equally well
to all types of schemes—size shouldn’t be an issue,” Dowell
asserted.
iiSEARCHES indicates that roughly
70% of the European fiduciary market
stems from mandates by U.K. and Dutch
pension funds. In particular, pension
funds based in the Netherlands have
been active users of fiduciary managers
for more than 10 years. Other anecdotal
evidence suggests that approximately
85% of the fiduciary management
market in Europe is dominated solely
by the Dutch. “Since originating in the
Netherlands in the early 2000s, fiduciary
management has transformed the Dutch pensions market,”
said Christy Jesudasan, senior client director at MN. He noted
that this transformation is attributable to the benefits fiduciary
management offers, including: allowing trustees to focus on the
setting of strategic investment policy and strategic important
decisions; enabling small- and mid-sized schemes to share in
economies of scale, sophistication and diversification that would
normally only be available to larger schemes and ultimately,
helping pension funds to tackle their funding gap and meet
long-term funding goals. “U.K. pension funds face similar issues
to Dutch schemes and given that fiduciary management can
provide the resources, investment expertise and scale they are
after, fiduciary management is now gaining traction in the U.K.
market too,” he added.
It may be no coincidence that between 2001-2012 Dutch
private pension fund assets to GDP ratio grew about 56%—the
most than any other country, according to the Organisation for
Economic Co-Operation and Development’s (OECD) Web
site. “We believe that fiduciary management is fast becoming
the governance model of choice for U.K. pension trustees. We
expect the strong growth in fiduciary management to continue—
indeed we would expect the majority of corporate defined benefit
pension schemes in the U.K. to adopt a fiduciary management
model over the course of the next five to 10 years. More and
more trustees are seeing how a nimble decision-making
framework can lead to increased control over pension scheme
funding levels,” Love concluded.
Amrita Sareen-Tak is a consultant at JCRA Financial, a financial
risk management firm. Prior to joining JCRA, she spent 11 years-
plus at HSBC, primarily within the bank’s capital markets group.
If the advisor is not comfortable with
performance related fees, then how could
the trustee get comfortable with what the
advisors claim they can deliver?
—Tony Goddard, Pirelli
(continued from page 14)