UK - Mercer Investment Consulting has become the latest consultant to advise clients on using "liability benchmark" mandates to boost returns.
The consultant – echoing earlier calls from rivals Hewitt Bacon & Woodrow and Watson Wyatt – believes that setting fund managers the simple objective to “beat scheme liabilities” would allow them to produce the best possible absolute returns for their clients, regardless of the asset class.
Mercer head of investment strategy Andy Green said: “In the last three years, many managers have outperformed their index benchmarks, but schemes have still suffered dramatic falls in their funding levels.
“With the consensus expectation of lower absolute returns and uncertainty surrounding equity markets, trustees will need to diversify their sources of returns outside equities in order to restore funding levels.
“This approach would require managers to determine the exposure to asset classes at any point in time, as well as the best use of their active management skills across asset classes.”
Watson Wyatt head of European Investment Consultancy Nick Watts said this type of mandate should also be extended to equity managers to encourage a more “long-term” approach to investing assets.
“There’s been an over-focus on short-termism. These mandates are more long-term in nature because the benchmark is against liabilities, not the market.”
Merrill Lynch Investment Managers managing director, institutional clients Andrew Dyson said: “The principle here makes sense from a pension fund’s point of view. One of the good things about asking the manager to achieve gilts +4% is that it allows him to focus solely on what the client wants.”
But another fund manager – who declined to be named – said that consultants should be looking at ways to help their clients, rather than trying to devise the perfect asset allocation mix.
“As Warren Buffett’s business partner Charlie Munger said, if consultants had such wonderful insights, maybe they’d have Berkshire Hathaway rather than a consultancy.
“And, in respect of UK investment consultants, maybe their clients would still have a solvent pension fund.”
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