How are the reporting standards for fiduciary managers bedding in?

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Fiduciary managers might have got away lightly in the eyes of many, but one of the effects of the Competition and Markets Authority’s review was the introduction of industry standards for presenting past performance. Which managers adhere – and what can and can’t the standards do? 
When the CMA published its order with the remedies required to fix competition in the investment consulting and fiduciary management market, part 6 required fiduciaries to present performance data in a standard format. 
The industry has developed these standards and, under the umbrella of the CFA Institute, published the Global Investment Performance Standards for Fiduciary Management Providers to UK Pension Schemes, which came into force last December. They require providers “to create and maintain composites for all strategies for which the fiduciary management provider manages UK pension scheme assets”, to prevent them from cherry-picking their best performance when presenting to pension funds. Fiduciary managers showing performance to pension funds must adhere to the standards. 
There are around 20 fiduciary managers currently active or planning to become active in the UK, and those that have signed up to the standards can choose whether they want their name to appear on the CFA’s website. 
Twelve are currently listed on the site: 

  • BlackRock Investment Management (UK) Limited
  • Cardano Risk Management Limited
  • Goldman Sachs Asset Management
  • Hewitt Risk Management Services – An Aon Company
  • Kempen Capital Management (UK)
  • Legal and General Assurance (Pensions Management) Limited (“PMC”)
  • Mercer Limited
  • River and Mercantile Investment Limited
  • Russell Investments Limited
  • SEI Investments (Europe) Limited
  • Towers Watson Limited

Schroders has said it is compliant but does not have its name on the list. 
Firms that plan to comply include Charles Stanley and Gatemore Capital Management, whose head of institutional clients Mark Hodgson said that the company is in the process of integrating the standards into its systems and intends to comply “in due course” but added that “it is not a straightforward process”. 
Five firms believed to be active in the market did not respond to enquiries by mallowstreet, including State Street Global Advisors and BMO, while Cambridge Associates declined to comment.

Understanding fid man performance 'not easy'

Roger Brown is a director at IC Select, the fiduciary management assessment firm that developed the standards which formed the basis for the CFA GIPS. He said it was encouraging that most firms have already claimed compliance, adding: “The enforced adoption of this standardised approach to showing performance will help trustees when they are tendering for a fiduciary manager.” 
However, he cautioned that despite the standard format, understanding performance of fiduciary managers is not easy. 
“Users of the data need to be aware that there are some greater complexities in understanding this data, particularly when compared to using the GIPS performance data for a traditional asset manager,” said Brown.  
“Hopefully the guidance that is soon to be published by the Pensions Regulator to help trustees understand the performance data will help them to navigate these complexities,” he added.   

Are there enough clients for meaningful analysis?

Concerns that the standards still present data in a way that clients might find difficult to interpret is echoed across the sector. 
André Kerr, a partner at consultancy XPS, who is also on a technical committee for the standards alongside other consultancies and professional trustee firms, said it was “extremely useful” to have a consistent way for fiduciary managers to report performance. 
However, he explained that for the data to be meaningful, a manager would need to have at least 10 clients in each strategy ‘bucket’ - which is all but impossible given the number of managers and clients in the market. 
Source: XPS
A lot of managers, he said, “have holes, where they have none or only a few clients” for a particular strategy, defined as the return over liabilities it seeks – even the big three would struggle to find that data at the margins, and new market entrants do not have it, which becomes an issue where consultants exclude providers if they can’t demonstrate past performance.  
“People having these standards could stop some from entering the market,” he warned.  
While the standards stop managers from cherry-picking performance, they have their limitations when it comes to comparability.  
“You can’t just blindly use it,” said Kerr. “The people who created it... were of that, but I don’t think the wider industry is, it is seen as a panacea to allow performance comparison on a like for like basis.” 
“With the best will in the world you’re never going to fix those problems. You're never going to get like for like,” said Kerr. He cited tender exercises his firm ran with a long list of six managers. “In none of the exercises we have been able to get a full set of managers,” he said. 
Source: XPS
The standards are a “good framework” for comparing performance but “lack some effectiveness when determining the appropriate composite for clients, especially in the unconstrained vs hedge ratio constrained buckets”, argued André Keijsers, managing director at Kempen UK. 
He said that the current approach is subject to interpretation or seeing unconstrained mandates move around different hedge constrained buckets, making comparison more difficult.  
The standards are included in the growing number of RFPs, he noted and selection consultants expect information related to the standards, “but as of yet [they] don’t seem to have standardised the information requests amongst themselves, which we assume will happen in the future”. 

Clients 'not inquisitive'

Others said not much has changed since the introduction of the standards. “Much of our performance analytics already complied with the majority of the standard so our clients have naturally been less inquisitive about the standards themselves,” claimed Devan Nathwani, investment strategist and researcher at Secor Asset Management. 
“Whilst our clients have not asked about them in detail, we think the standards will be a valuable tool in the ongoing efforts to level the playing field for winning new fiduciary management mandates,” he added. He said the process of integration had been “relatively straightforward” given that the fiduciary management industry had been engaged in advance through working groups held by the CFA Institute.  
Many fiduciary managers were already using provisional versions of the standards, agreed Bob Campion, head of fiduciary management at Charles Stanley, but the fact that there were internal systems already up and running also meant that “even making small changes” could be time consuming. 
Campion said it was too early to say whether the standards are beneficial for pension funds, and criticised their lack of distinction between growth and liability-matching portfolios.  
“It tries to iron it out in the hedge restricted bucket, but even within that it’s mixing it all up,” he argued. “The next step on it would be to have some sort of harmonious way of presenting growth performance, stripping out all the liability matching.”