Pension schemes seek to create own fund of funds

Pension schemes are increasingly rejecting pre-selected fund of funds in favour of creating their own portfolios, as they look for direct control over their investments, according to a senior investment consultant at Mercer. Long/short funds and distressed debt products were attracting particular interest.

Tom Geraghty, business head of investment consulting for Europe, the Middle East and Africa, said institutional investors were scouting for single hedge fund strategies after a year in which fund-of-fund losses have cast doubt on manager skill.

"If anything the approach to investing in hedge funds going forward will be multi-strategy as opposed to a broad collection of hedge funds," he told Reuters.

There has already been evidence that pension funds did not lose faith with hedge funds through the credit crisis, but Geraghty's comments suggest a clear change in emphasis.

Van Mac Group Managing Direct Scott MacDonald agrees, adding that his company’s research has shown a trend away from paying fees to funds of funds promoters that haven’t met expectations in terms of adding value through underlying manager selection. “This makes it very difficult to justify their fees.

“We expect more pension funds to follow the trend and go direct,” he adds. “Van Mac Group’s managed account platform is an efficient way to select a cohort of top performing managers, with customized regular reporting on those managers’ performance providing a much greater level of transparency and greater control for the investor.”

This is supported by Mercer’s views. Tom Geraghty said the change in mood brought about by the shock of the credit crisis has also pushed pension fund trustees to seek greater expertise and a higher degree of accountability in both their fund managers and consultants.

As a result, Geraghty said he expects Mercer's fiduciary business -- which gives consultants far more control -- to grow by up to four times in the next three years, accounting for as much as 20 percent of the global business.

"That goes with the fundamental changes around risk management and governance," he said.

Fiduciary management sees consultants take direct responsibility for allocation and investment decisions within parameters agreed in advance with the pension scheme. Under a standard arrangement, the consultant would advise the scheme on issues including the hiring of fund managers.

The fiduciary model has been pioneered in the Netherlands since the turn of the century and has also seen fund managers take on fiduciary roles.

"Unrewarded risk is off the table. (Investors) accept and acknowledge increasingly that it is about making the right asset allocation decision as opposed to the manager you pick," Geraghty said. He said fund managers and consultants must adapt. 

Van Mac Group and  Reuters