UK - Watson Wyatt has welcomed the government's recent report on progress by the investment industry in adhering to the Myners principles for institutional investment decision-making.
Commenting on the report, Nick Watts, head of European investment consulting, said: “Despite significant progress in many areas, particularly the increased focus on the asset allocation decision and resources devoted to it, we agree that more effort is still required to improve the governance structures of trustee bodies while taking into account greater interest from scheme sponsors.
“Additional emphasis on this area is therefore welcome as is the desire to augment investment expertise involved in key decisions, particularly against the back drop of the need for increasingly sophisticated investment solutions.”
Watson Wyatt said it agrees further improvements are needed on the way trustees engage and evaluate investment consultants, but cautioned against approaches that are “too prescriptive in nature”, instead recommending a “balanced scorecard approach”.
The firm added that pension funds, forming an important link in the corporate governance chain, should be more effective as owners of companies.
Watts said: “To this end greater efforts need to be made to ensure there are suitable structures, largely via fund managers, for trustees to evaluate and engage with their investee firms on corporate governance issues.”
The separation of strategic asset allocation advice and investment manager selection has “some logical merit” but could result in costs increase and disjointed decision-making, the firm warned.
“In the last three years, as pension funds have become more open to innovations such as absolute return investing, risk budgeting and liability-driven benchmarks, there has been a blurring between traditional strategic asset allocation and manager selection as well as a compression in the time between such exercises,” Watts noted.
“The result is that our clients now seldom view asset allocation and manager selection independently, but rather as a joined-up, risk-based investment strategy that is dynamic. Therefore separating these decisions could undo much progress and put a cap on innovation.”
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