A whole industry has grown up aimed at measuring the success or failure of investment managers. Ever...
A whole industry has grown up aimed at measuring the success or failure of investment managers. Every quarter, tens of thousands of pounds change hands for the information the surveys contain.
But what is the purpose of performance measurement? Do the reporting services currently available meet the real needs of the pensions investment community? Questions have recently started to be asked both as to the validity of the basis on which the statistics are collected and the use to which they are being put, including the performance measurers themselves.
Acceptable ground rules
It is principally the responsibility of the measurers to begin the process of establishing acceptable ground rules for the compilation of statistics, and for their use and publication. But they can only do this if they listen carefully to what their public wants, and they respond as fully as possible to what they learn. However, the investment managers, too, have a responsibility.
Performance measurement must adequately satisfy one overriding need. This is the requirement of pension trustees and their advisers for reliable, easily understandable and, most crucially, objective information on how well (or otherwise) their incumbent managers are doing in making their assets match up to the long-term liabilities of scheme members and pensioners.
Secondary needs are those of the managers, who have an entirely legitimate interest in how their performance compares with that of their peers in the business. They will also use them - often mercilessly - to promote their own services to potential clients and their consultants. Inevitably, the press will pick up on details contained in the surveys and at press briefings. In isolation, and out of context, some of these details may serve only to cause trustees to see problems where none really exists. By and large, trustees are not professionals at that task, and need as much clear and unequivocal information as the market can supply to them, and their and their members' interests are not well served by the selective use of information by the press. But that is to get ahead of the argument at this point.
A successful debate must centre on two issues: the fund classification used by the providers (comparing like with like), and the minimum period over which performance should be measured.
Massive changes in the pensions world means the needs of schemes are changing and the old certainties of investment strategy are being challenged. For many years, the asset allocation used by most pension scheme trustees has been uniform, emphasising the use of equities and, in particular UK equities. But a range of factors, some legislative, others market-based, are driving trustees to a sometimes radical reconsideration.
Existing defined benefit schemes are coming under growing pressure from an ageing population, with a higher life expectancy. Companies' desires to limit their own costs and liabilities by closing defined benefit schemes to new members and setting up replacement defined contribution schemes exacerbates the problems that trustees of defined benefits schemes already face. The Minimum Funding Requirement is forcing schemes to go down more conservative routes and the removal of the tax credit for ACT on dividend payments to schemes means schemes have moved away from equity investments towards fixed income as the easiest way in which to make up lost income and deal with any deterioration in solvency. Socially responsible investment and corporate governance are other new issues, recently imposed by legislation and encouraged by trustees. The world has changed, and performance measurers must catch up if surveys are to remain relevant and valid.
To take the CAPS pooled fund survey as an example, the basis on which information is collected and presented does not correspond with the real world of funds. Should CAPS perhaps look more closely at the asset allocation of funds, refining its classifications so that a group of trustees can examine the performance of managers and compare it with a group of similar managers? Currently the survey lumps together all pooled fund managers, whether they provide a service for a mature fund or for a fund with MFR problems.
One suggestion is that CAPS should impose a minimum fund size for inclusion. It is important also that it clarifies the ways apparently similar funds are managed. It is wrong to assume the smaller funds take more active positions than larger members. Fuji-Lord Abbett is a firm that holds a large proportion of equities in its fund, which might be expected to produce quite different results from a more typical mixed with-property manager. Another is Orbitex, which holds only 40 or 50 stocks. Is it right to classify other small funds, which may hold diversified portfolios of 350 stocks, with these specialist funds? Analysis does not reveal the quality of the underlying funds in which mixed funds invest.
A final criticism of the current structure is the extent to which focus is on the short term. Blame for this must be placed at the doors of surveyors, fund managers and the press. Trustees in the UK are not professionals and their task is made harder by suggestions that three-month and one-year statistics are relevant in monitoring performance of long-term investments. Recent coverage of one-month HSBC Image Survey statistics gave a very odd view of what was really going on in the market.
David Netherton is head of marketing and client relations, investment services at Swiss Life UK
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