In the third of a series of interviews with fiduciary evaluators, Margie Lindsay speaks to IC Select’s Peter Dorward about his firm’s approach to fiduciary assessment.
While performance is important, IC Select managing director Peter Dorward says, it is not the most important factor in selecting a fiduciary manager as it is based on relatively short timeframes and market conditions.
"It is dangerous to compare the performance of one fiduciary manager against another as it is driven by looking in the rear-view mirror. You need to look forward at the road ahead," Dorward explains.
"Trustees need to be confident in the process in terms of investment philosophy, strategic advice, portfolio construction and manager selection as well as operations, execution and robust governance. Our understanding of this from a practitioner's perspective is the foundation of the work we do."
This effort follows the introduction by the Competition and Markets Authority (CMA) of a package of measures for trustees and managers of occupational pension schemes to take effect this December. These include a mandatory competitive tender before appointing a fiduciary manager for mandates covering more than 20% of scheme assets.
At the heart of IC Select's approach as an evaluator is research. "The approach we take is to consider what value is created by the functions of the fiduciary manager and to use these to assess them. Are they creating or destroying value is the main question," explains Dorward.
For its assessment process IC Select looks at a variety of fiduciary manager functions. This includes the corporate backdrop - things like organisation, personnel, resources, client coverage and stability of clients. The number of clients serviced is important, says Dorward, because it can put stresses and strains on a business, particularly if it is taking on too many new schemes.
Investment philosophy, portfolio construction and manager selection are considered, specifically in terms of whether these criteria will deliver against the scheme's objectives.
Within manager selection, a key element is how the success of the process is assessed. IC Select looks to see if performance is ahead of the benchmark and fund objectives as well as how the fiduciary manager oversees its underlying managers on an ongoing basis. It checks the fiduciary manager has the resources to do all of this on a regular basis.
Something that is sometimes overlooked is the scope of the manager universe itself. Dorward says it is important to see how firms use in-house capabilities and assess their own funds compared to external ones and make sure there is a consistent and equitable process applied to both.
Legacy issues can influence this. For example, if a fiduciary manager is covering thousands of managers globally, there may be some still in portfolios that are no longer on the current buy lists.
Environmental, social and governance (ESG) issues are separated out from the broader investment piece by IC Select as it considers this an important area attracting increasing attention and scrutiny. "There is a greater focus on this aspect of asset management and manager selection," says Dorward. Although the ways to evaluate ESG is still being developed, IC Select uses six principles to assess how committed a fiduciary manager is to ESG principles.
First, Dorward is looking to see how integrated ESG is into the overall processes of the manager and manager selection. The manager's approach to active ownership, client engagement and how ESG can be a real driver of value are assessed. Dorward says a firm's approach to active ownership and engagement is as important as its portfolio holdings.
Transparency when reporting ESG issues to clients and producing voting records as evidence shows commitment to principles. Climate impact assessments on the overall portfolio or plans to introduce these are now expected.
IC Select's monitoring of ESG factors is based on the UN Principles of Responsible Investment (PRI). These give a clear steer on what areas to address as well as how to report on ESG.
CV: Peter Dorward
Position Peter Dorward is the managing director of IC Select having joined the business in October 2014. He has over 35 years of experience in investment management and broader financial services in the UK and overseas. He also chairs Royal London's independent governance committee.
Previously Prior to joining IC Select, Dorward held senior positions with a major fund management company, latterly as head of the institutional business at Scottish Widows Investment Partnership.
Three areas of importance for scrutiny cover overall operations, governance and reporting. "The operations and execution framework of a fiduciary can destroy value if it isn't set up, managed and invested in appropriately," says Dorward. "How they manage trade processes and control mechanisms around trades as well as underlying third-party manager assessment of trading, custodian relationships and other issues is important," he adds.
Cash and collateral management from a trustee perspective is about addressing liquidity on an ongoing basis as well as the overall liability cashflow of the scheme and ensuring cash reconciliation is managed and aligned to the scheme's commitments.
Another area that Dorward puts emphasis on is transition management. He is keen to ensure any transition from to a fiduciary manager is as smooth and efficient as possible. This means he will be looking closely at the team carrying out the transition, checking if there are any capacity constraints and looking at the track record of the fiduciary manager in transitions. Costs also figure in the assessment.
In order to compare fiduciary managers on all these areas, IC Select uses a five-point rating system. "It is kind of obvious," admits Dorward. "We use this approach to assess each of the value-creating functions we focus on as the foundation for selection as well as oversight on an ongoing basis. We're constantly assessing these areas on an ongoing basis and not waiting for clients to ask about it"
This allows IC Select to focus the tender document on the scheme and what its requirements are. "We include what is most relevant and pertinent to the scheme so the fiduciary manager has the opportunity to showcase itself, showing what it can do for the scheme to meet its objectives with confidence and is engaging in all areas that are important for the scheme, including ESG," explains Dorward.
This methodology, coupled with IC Select's own due diligence process on fiduciary managers, should also help trustees focus mainly on the tender and the specific areas it believes are important. "We think this is more efficient. Ultimately, it helps to get the best fit for the scheme," says Dorward.
"We go through an online questionnaire first with the trustees, looking at investment beliefs and then discussing with them the individual aspects of their requirements for the scheme. These are written into the tender so fiduciary managers have enough detail and information to understand exactly what is required."
Another crucial element is the investment philosophy of the fiduciary manager. Dorward sees this as a competitive advantage and wants it clearly communicated in writing as well as face-to-face with the fiduciary managers bidding for the contract.
"We want to see how the fiduciary manager will work to the scheme's objectives and understand risks and models used. From portfolio construction through the whole process, including their time horizons for strategic and tactical asset allocation, we want to see what approach they will take and how they will achieve their objectives," says Dorward.
This detailed approach, using templates and its own rating systems, helps IC Select compare and contrast fiduciary managers on a like-for-like basis. It believes a standard approach needs to be used when selecting a fiduciary manager and this is why the company originally used its own research and resources to launch a performance standard that has now been accepted by the industry.
These standards were developed over many years and evolved from work IC Select did on due diligence research on fiduciary managers as well as early tender processes for selecting managers. The idea was to use evidence of outcomes on strategy and implementation of those strategies in the performance of the manager and to have a way to oversee processes and investment philosophy.
There can be a bias in how a fiduciary manager presents its performance and approach to investment, notes Dorward. "We believe consistency of presentation and performance is needed and we ensure this through the tender process so we have more transparent and easy to understand responses from managers," he notes. The basis for this approach is the Fiduciary Management Performance Standard, formerly known as the IC Select Fiduciary Management Performance Standard.
The last, and some may think one of the more important parts of the fiduciary management puzzle, concerns fees. "It is important that trustees do not go for the cheapest and discount the most expensive fiduciary manager because there are many determining factors that make up fees. The key issue for trustees to consider when looking at fees is what sort of assets sit in the portfolio and relate this to the investment objectives they want to achieve," explains Dorward.
He helps them understand what makes up the fees and what charges relate to the underlying managers as well as expenses related to the portfolio.
An analysis of the fees will help trustees understand the absolute fee level for the fiduciary manager. "As part of the tender process we help trustees understand all of the components of the fees being proposed. Help them understand how much is paid to the fiduciary managers, how much is paid to underlying investment managers and how much relates to expenses and transaction costs. Our analysis of fees also highlights the sensitivity of fees to changes between matching and growth assets and how much improvement in risk with the portfolio is expected when compared to the current portfolio, per unit of cost," he says.
As IC Select assess fees across all fiduciary managers, it is able to see differences and judge what an appropriate fee level is. "Within the oversight process, it is up to us to help trustees understand the component parts of fees and additional expenses occurring as well as what transaction costs are likely to be - something that has to be disclosed under Mifid rules - and then compare these different parts of the fee, against the IC Select Fee Survey," says Dorward.
This is something that is perhaps easier for IC Select to achieve as it carries out a regular survey of fees within the industry. While this is proprietary research to IC Select, the company sees it as an accurate comparison of fees linked to specific services. "The survey covers the whole market and is part of the due diligence review we do every six months. It is a live view of what prices look like in the market," Dorward confirms.
The survey allows IC Select to look at the total aggregation of fees and to compare these as they apply to similar sized schemes. However, not all fees incorporate the same level of services, cautions Dorward. "It gives us a really interesting insight into what fees are actually charged and for what services," he says.
IC Select's own fees are in line with other third-party evaluators, says Dorward. Based on client feedback, he thinks the company is "probably middle of the road in terms the absolute level of fees. In John Lewis terms we are ‘never knowingly undersold' given the depth of work and therefore value we provide to the fees charged."
What he thinks gives IC Select an edge in the market is the depth of its research. "Fiduciary managers are very open to sharing information with us as they do not see us as a competitor, so we are given free and unlimited access to information, we are not conflicted," notes Dorward.
As an organisation IC Select sees maintaining the quality of its research and the quality of work with clients as the real differentiator between it and others. "We ensure we do a good job," Dorward notes, adding, "We think our approach is the best one including the creation of the tender document. It's been evolved over time and based on fundamental investment beliefs and an understanding of the scheme's requirements. We think these are the steps trustees need to get the right outcome."
While IC Select usually deals with schemes that are £100m or more, it stresses that its approach does not vary, no matter what the size of the scheme. Dorward explains: "We go through the same process irrespective of the scheme size. That's important. We understand the universe of fiduciary managers and believe we go through a process that is appropriate and at the right level to give the best outcome for trustees."
Part of the IC Select process is to also consider what happens after the fiduciary manager is appointed. "That's essential. It ensures the tender includes all aspects from reporting through to the provision of data as part of the oversight process and also ensures the fiduciary manager appointed is aware of the ongoing requirements," says Dorward.
Like other evaluators, IC Select is concerned about capacity within the industry. "We have been invited to tender to 52 schemes over the last year and won around half of these so far. We've had to increase our resources to cope with this growth but at the same time we intend to balance our work with schemes to ensure we maintain the quality for them as well as with our research," explains Dorward.
Most important is for trustees to understand the universe of fiduciary managers and have a clear approach, whatever their process, to choose between them. "There has to be clarity over what the scheme's own requirements are. They need to understand all aspects of their own scheme before selecting who they want to work with. We can take them through that process," notes Dorward.
"This is a marriage, not a date. Schemes need to treat the selection of a fiduciary manager with the right level of rigour and not approach it lightly," he concludes.
The fiduciary evaluators
Barnett Waddingham's Peter Daniels