Is it time to revisit Fiduciary Management?

Is it time to revisit Fiduciary Management?

Fiduciary Management and OCIO (FM for short, in this piece) are governance approaches where investment advice, implementation and asset management are bundled.  A range of investment powers are delegated.  Over two decades the number and size of this market has grown steadily, but the last three years has seen some £multi-billion schemes embrace FM. This felt like a turning point.

Historically, FM portfolios had an LDI core with the remaining assets diversified across multiple asset classes across a spectrum of risk.  Some assets would be complex/illiquid, with active management a key feature.  The business case made a lot of sense – leaner investment governance (usually) charged with closing a deficit.

Many schemes are now better funded, so does the business case stand?  To its credit the FM market is meeting the challenge.  We see moves to simpler, lower risk portfolios, either for running on, or for settlement.  This amounts to a quite a change towards portfolios seeking to ‘simplify and maintain’.  In our view this chimes with what the market needs. 

We also have schemes having to prepare Own Risk Assessments under the General Code.

For traditional (non-FM) governance models, a direction towards lower investment risk doesn’t necessarily mean lower operational risk.  Most schemes will be rebalancing assets, cashflow negative, and drawing down income and capital against benefit payments.  Regulation and reporting are more challenging than before, seemingly a trend . 

This is especially true for trustees and in-house pension teams.  We remain nervous that in-house teams are facing some turnover as staff reflect on career prospects, or chose to leave the workforce (ie retire).  

The fact remains that the FM model has some embedded conflict, arising from the bundling of asset management and advice.  And like any business, no FM is immune to change, whether externally or internally driven. 

These issues are known, understood and (we believe) manageable as long as an FM mandate is subject to robust independent challenge and oversight.  This could be provided by a third party, or co-opted expert, or through (for example) a Corporate Sole Trustee governance model.

We also observe that there’s good evidence of the best FMs successfully taking their client schemes to buy-out.   In other words, managing the conflict that delivering on the ‘mission’ reduces future fund fee income.

This piece argues that FMs have a continued role to play for well-funded schemes.  We'd qualify that where a scheme is properly ready for buy-out, with settlement highly likely within (say) three years.  Anecdotally, the FM take-on process can be onerous and expensive, with high acquisition and set up costs.   It’s hard to see that the economics work for either the scheme or the FM over a short period.

Conclusion

To conclude, we see FMs adapting strategies and their thinking to respond to a different, improved funding landscape. 

For traditionally managed schemes, lower investment risk doesn’t mean lower operational risk and we think FMs may well provide an elegant solution.  Just as long as they’re subject to robust challenge and oversight. 

This may however mean that those who've rejected FMs in the past may have reasons to re-visit.