The obvious question is: why has it taken so long for a fund manager-sponsored education initiative to get off the ground? In the five and a half years since the bursting of the technology bubble precipitated a stockmarket slump, why has no fund manager seen fit to try to fill a knowledge gap which is hindering demand for the increasingly complex investment products they are so energetically promoting?
While cynics might say that GSAM will use the seminars to push its products, the initiative, albeit long overdue, is to be welcomed. For a recent pilot study of UK pension fund trustees has revealed a poor understanding of issues relating to the asset management of defined-benefit and defined-contribution schemes.
Fifty-six per cent of respondents had little or no understanding of the structure of investment portfolios and 54 per cent had scant knowledge of how to adequately review investment arrangements, according to the pilot results of Alexander Forbes’ new Trustee Knowledge and Understanding self-assessment test.
Sixty-seven per cent of respondents were unaware of the implications of the ownership of assets, while 61 per cent had little or no knowledge of performance measurement including the use of indices.
Nicholas Boyes, director, Alexander Forbes Trustee Services, said the knowledge gap did not surprise him and noted that such fund management issues were “new territory” for lay trustees coming from a world of balanced mandates and indexed portfolios. He added that trustees now needed to be proactive to improve their investment knowledge.
This is sound advice. If in the past, pension fund trustees were happy to rely on the judgement of their consultants and balanced fund managers, they must recognise that that time is over. And why wait for fund managers, whose motives are questionable, to take them by the hand? Surely they can see that if they had been in a position, five or six years ago, to challenge the advice of their consultants, some of them might not be struggling now with huge funding deficits.
Now trustees are being bombarded on a weekly basis with the latest and greatest liability-driven investment (LDI) strategy. But one wonders are they able to see through the hype to make meaningful product comparisons and an informed buying decision?
Some fund managers believe that trustees are not even ready to implement LDI strategies. F&C Asset Management said most UK pension funds are still using traditional balanced mandates. Relatively few are pursuing the so-called “new balanced” approach which builds a diversified portfolio of traditional and alternative assets.
But other fund managers claim that UK trustees are more sophisticated than they are given credit for and are fully aware of the need to adopt some type of LDI strategy.
Guy Stern, chief investment officer and head of multi-asset class solutions, UK/US at Credit Suisse Asset Management, contended that younger, newly-appointed trustee would look at LDI “fairly quickly and make a decision”.
A different story then, depending on who you speak to. It would be nice to know that trustees are being proactive. But one suspects this is just wishful thinking.
Overinflated fees
The high level of performance fees charged by funds of hedge funds and funds of private equity funds has been highlighted in a new survey by consultants, Watson Wyatt.
Over 10 per cent of such funds of funds in the study were found to have base fees in excess of 1.5 per cent per annum.
Roger Urwin, global head of investment consulting at Watson Wyatt, said that once performance fees are included, investors would have to work hard to ensure that alternative assets remained “a value creation proposition” for pension funds. He noted that some clients have decided to make direct investments in these asset classes to reduce fee levels.
Funds of funds managers should take note. High fee levels,particularly at a time when hedge funds are still recovering from the losses in May and June, can only prompt more asset outflows.
Funds of hedge funds, for instance, might still be the preferred choice of first-time institutional investors in alternative assets, but for how much longer? The survey showed that funds of hedge funds managed to attract the most new money in 2005, accounting for 44 per cent of net new inflows. This, however, was down from 50 per cent of new money in 2004. But is this fall-off in asset growth necessarily a bad thing in view of the capacity constraints that some managers are contending with? Time will tell.
Henry Smith, editor,
henry.smith@ft.com
