When Goldman Sachs’s then European co-chiefs Suzanne Donohoe and Ted Sotir first started to do the rounds of UK consultants in 2001, they were treated cynically by the likes of Mercer and Watson Wyatt. “Watch out, the Americans are coming,” was the often dismissive retort from the self-styled selection specialists.
At best, the dynamic duo was welcomed with the peculiarly British raised eyebrow: “I see the Americans are here.”
After two years, the consultants began to relent, and after much talking, dining and scrutiny of performance figures, investment processes and risk parameters, one begrudgingly acknowledged: “I hate to admit it, but I suppose you guys know what you are doing.”
Once the cosy clique of the Big Five balanced managers had been broken by recommendations of the Myners Report in 2001, the way forward for outsiders had been paved. Now if there is a major tactical, equity, bond or cross-asset mandate being tendered in the UK or Benelux, you would expect Goldman to be short-listed.
Tellingly Mercer was responsible for choosing GSAM to run a Ł940m (€1.4bn) Universities Superannuation Scheme equities mandate earlier this year and an Ł85m active alpha fixed income brief from the Weir Group. Similarly, the flurry of mandates re-awarded to GSAM by the British Coal Staff Superannuation Scheme in 2003 were all officiated by Watson Wyatt.
Unsurprisingly, once such a relationship has been cemented, it has to be maintained,developed and the scope of the relationship increased.
But the UK is easily Europe’s most consultant-driven market. In Italy, Sweden and France, many large clients want to deal directly with firms such as GSAM. In Germany, consultants’ influence is rising, claim domestic players such as Union and Sal Oppenheim, but they never expect it to hit UK levels.
Currently, up to 35 per cent of mandates are at least “seen” by consultants such as Feri, Alpha, RMC and increasingly Mercer and Watson. But this is expected by institutions to peak at around 50 per cent. They say Germans will never hand full control to outsiders, UK-style, as they pride themselves in their knowledge of who’s who in their market.
Penetration is also increasing in France and Italy. Mercer oversaw the recent €17bn allocations by the FRR in France, a market once barely dented by two local players. But a closer look shows that Mercer’s role in the French choices was perhaps not as strong as it would have been in the UK.
“We did not really work that closely with the consultant,” says Patrick Riviére, head of Continental European business at Invesco, which won a pair of €230m active mandates in the French share-out. “Mercer helped on all the logistics of the tender, providing IT tools to make the first-round selections, when all the fund managers were trying to get in the game. But they were not present in the final. A selection committee was appointed for that purpose.”
What consultants have achieved in continental Europe is to re-shape the way business is done. “The presence of consultants in the market, whatever their penetration, changes the habits of the market,” believes Mr Riviére. “In France now, everything is done through RFPs [requests for proposal]. Event if the client conducts his own asset allocation exercise, manager search and selection process, he does it in the style of a consultant.”
Three or four years ago, in Paris and Milan, briefs were still awarded old-school style,across the lunch table to associates and contemporaries.
But influencing the market does not necessarily translate into fees for new business. And the most common grievance aired by consultants is that they are not sufficiently rewarded for their manager selection expertise.
A new business opportunity, presented by the still undeveloped defined contribution (DC) system in continental Europe might yet come to the rescue. Pan-European players, including Invesco, Credit Suisse and Alliance Capital are betting on an expansion in DC business from continental companies reluctant to assume pension fund liabilities.
“Consultants are very involved in constructing DC platforms for companies,” says Mark Luning, managing director of Alliance’s European arm, ACM International. “This is a very natural place for them to be involved as they already have corporate contacts through defined benefit plans. That’s how they can have a bigger impact in the European funds business, particularly if there is more legislation for DC plans.”
Yuri Bender, editor-in-chief
yuri.bender@ft.com
