Fixed-fee compensation is one of the defining characteristics of the contract between Pensioenfonds Vervoer and its new fiduciary manager, Robeco, chief investment officer Patrick Groenendijk told delegates at the Fiduciary Investors Symposium in Beijing.
The €11 billion Dutch fund for the transport industry sacked Goldman Sachs Asset Management as its fiduciary manager in June last year and since then has undergone an extensive review of the services it requires from a fiduciary manager, as well as its fees, accountability and responsibilities.
The experience of outsourcing to a fiduciary manager has made it clear the interests of the fund must come before the interests of the manager when it comes to compensation, Groenendijk says.
He says that previously there was a grey zone between the responsibilities of the pension fund and the fiduciary manager, with responsibilities for market timing decisions and asset allocation changes unclear.
In addition, while the fiduciary manager was one of the key advisers on strategy, the responsibility is with the fund.
He told symposium delegates that the fund now has clear lines of responsibility. The pension fund is responsible for formulating the investment plan, and while the fiduciary manager can advise, it cannot be the only adviser. The pension plan also has responsibility for proxy voting and engagement, as well as dynamic asset allocation decisions.
Meanwhile the fiduciary manager has responsibility for tactical asset allocation and manager selection, although the pension fund has the right of veto. The fund’s custodian, Northern Trust, which was operating as interim fiduciary manager, is responsible for compliance monitoring and reporting.
Groenendijk says outsourcing the operational management issues to a fiduciary manager, also known as implemented consulting, allows the board to focus on more strategic issues. It also provides an easier and more accessible route to certain asset classes such as private equity.
On the downside, fiduciary management can add hidden complexities and risks to the portfolio, and the ultimate responsibility for risk oversight needs to be clear.
The fund, which has 35 underlying funds managers, has 29 per cent in government bonds, 21 per cent in credit, 14 per cent in high yield, 1 per cent in impact investing, 29 per cent in equities, 5 per cent in real estate, and 2 per cent in infrastructure.
Pensioenfonds Vervoer decided in 2005 to outsource its investments to a fiduciary manager – which in turn would select and monitor underlying investment managers – appointing Goldman Sachs Asset Management from 2006 until 2010.
“As with every asset manager, you monitor and review,” Groenendijk says.
“We were unhappy with Goldman Sachs’ performance, and we were also unhappy with the underlying managers, and GSAM was rewarded on that.”
The fund had a policy portfolio that the fiduciary-managed portfolio was measured against, which Groenendijk says “added negative alpha”, which some reports have shown was as much as -14 per cent.
“We did acknowledge the economic conditions of that period, but still they were negative,” Groenendijk says.