UK - Mercer Investment Consulting is rejecting the use of unconstrained mandates and will continue to use benchmarks.
Mercer’s decision follows reports by Hewitt Bacon & Woodrow that it has gained clients on the strength of its new unconstrained mandate offering. This encourages managers to follow their best ideas without reference to benchmarks.
But Mercer says that while it has set up mandates which allow fund managers greater freedom to outperform, it believes these still need to be measured.
Mercer Investment Consulting global head of research Bill Muysken said: “It is a good idea to have an investable benchmark for a mandate, because it is good to have a clear understanding between the manager and the client.
“Managers do not need to hug the benchmarks as long as they understand where that neutral position is and where they are departing from. It is a reference point.”
Mercer has created the outline for tactical asset mandates where a manager has choice over the asset mix.
It also favours concentrated equity mandates where the fund manager focuses on its best equity ideas.
Muysken added: “A lot of our clients rely too heavily on the risk associated with equity market and not on the risk that their manager gets it wrong.”
Stagecoach Group Pension Scheme chairman of trustees and National Association of Pension Funds’ investment council member, Derek Scott, said that concentrated mandates were easier for trusteesto review in more detail at a single meeting than conventional mandates.
He added: “This leads to more emphasis being given to comparing returns with original cost than is the case with relative benchmark reporting.”
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