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My Thoughts

These short pieces are prompted by various pieces of news and how I feel that they will affect the Corporate Pensions community. Please feel free to send me any thoughts and comments that you may have.

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Wednesday 17 February 2010

Monitoring and Appraising your Investment Consultants

The role of Investment consultants can broadly be split into to areas - investment strategy and manager selection. In general manager selection naturally follows on from the strategy that is set by the trustees.

With detailed analysis of recommendations and subsequent monitoring of the strategy Trustees will a better chance of being sold unnecessarily complex and expensive investment solutions.

When considering the advice given to them, trustees need to always be aware that a more complex strategy will lead to higher fees for the consultant. There is never a correct answer and trustees may like to consider the comparative merits of a more simple, lower governance solution alongside a more costly complex solution.

I also believe that when considering the implementation of a particular investment strategy the starting point should (where possible) always be the cost of 100% passive solution. Trustees then need to consider the chances that any active solution could produce additional returns over and above the passive solution taking into account all additional fees. These should include not only the additional active management fees, but also the additional investment consultant costs and the time the trustees spend monitoring the arrangements

Trustees also need to analyse the potential for and probability of complex strategies adding value (or indeed losing value if additional risk taken has a detrimental effect on the performance of the strategy). Once all additional costs have also been factored in, they can reach a conclusion as to whether these strategies are in the best interests of the scheme.

Trustees also need to analyse the effectiveness of the consultants manager selection recommendations. This should include the cost of moving the monies between the managers which will have a drag on performance of the assets. Sometimes these costs can be significantly mitigated if the trustees allow a period over which the changes can be made. It should obviously not be forgotten that these should be compared net of fees and costs and compared not just to an index but also index managers - index managers do not always match the index and can give a better proxy of the returns available from a particular market.

This monitoring should be carried out on a regular and consistent basis. Ideally this needs to be carried out independently from the consultant to ensure an unbiased approach.