Fiduciary management is a hot topic in the Netherlands, with large new mandates being awarded, such as the €21bn fiduciary mandate awarded to Mn Services by PME, and the €4.6bn multi-manager brief awarded to Interpolis (now Syntrus) by the Akzo pension plan. In 2006, Mn Services, Interpolis and Goldman Sachs all benefited from such large inflows.
Currently the buzzword in the Dutch institutional sector, fiduciary management involves the integrated outsourcing of asset management and related activities, including services such as consulting to a single provider. This incorporates three elements: policy advice to the management of the pension plan, implementation of the policy and control over the fiduciary process.
“Fiduciary” in this sense means “trust” and “partners in business”, but does not involve the outsourcing of responsibility that tends to happen in the US. The aim is for the management of the pension plan to have an integrated policy approach, to improve professionalism and to boost efficiency without having to cope with the day-to-day hassle of the fund. It is designed to give the trustees more time to focus on a higher policy level.
Fiduciary management is something of a Dutch phenomenon, although there is some interest in Scandinavia, the UK, Germany and Eastern Europe. In the Netherlands, there is stiff competition, with at least 20 institutions currently offering fiduciary management.
Dutch institutions hold a strong position in this field, particularly among medium and small-sized pension plans. Foreign managers are less prominent in fiduciary mandates below €250m, since according to most foreign providers, the yields on these are too modest to merit the labour intensity and marketing costs involved.
Dutch providers are now stepping up their marketing efforts and gradually gaining ground in the big pension plan sector. They argue that they have the advantage of a thorough knowledge of the Dutch market and its complex regulations and legal issues. At present, total externally managed Dutch assets amount to €618bn. Fiduciary management, multi-management and overlay programmes (currency, GTAA, derivatives) total €172.7bn – up €70bn compared with last year’s €103bn. The remaining market potential of fiduciary management is hard to tell – estimates range from €50bn to more than €100bn over the next three to five years. According to consultants KPMG, interest in fiduciary management has declined. Barclays Global Investors says it is not interested as it does not offer asset/liability management and does not see much market potential in fiduciary management.
Not all fiduciary managers offer the same services and products. Some offer a bundled package, others an unbundled offering. Some parties offer only multi-management. Others extend a broad range of services including high-level strategy, balance sheet management and risk management. So it might be time for a system of classification.
The growth of fiduciary management is leading to more opportunities for third-party asset managers, both Dutch and foreign, to win outsourced specialist investment mandates. Former balanced managers are being replaced by fiduciary managers, who use approximately 25 underlying managers.
Fiduciary management offers reassurance to pension plan trustees since it gives them a single point of contact, who can help them out with a range of issues. Fiduciary management could be attractive to plans that lack expertise, but clients report mixed experiences. Some clients are enthusiastic, but some are disappointed that their providers do not live up to expectations. One pension plan complained: “They are not managing us, we have to manage them.”
The strength of the concept is also its Achilles’ heel. If the manager shows an underperformance in one department – for example, asset management – the plan has to decide whether to break it all up or, alternatively, bring in another asset manager. Some plans are clearly struggling with this issue. A crucial point is the cost and transparency of the sub-managers. Which costs are assigned to a newly incoming pension fund? Which costs are taken by other investors? What are the (double) performance fees, trading costs? Can the custodian monitor the costs? Which costs are included and which are not?
Another issue is that fiduciary managers in the Netherlands may be faced with conflicts of interest in advising the pension plan, implementing the asset allocation and controlling the whole process. Asset consultants are less than happy that all three functions are carried out by a single organisation.
At the end of the day, the fiduciary manager is susceptible to conflicts of interest, which is why a consultant should be engaged to oversee the quality of the whole process and offer strategic advice.
Frits Bosch, is head of Bureau Bosch asset consultancy, Nuenen, The Netherlands.
