Fidelity International: Divide and Conquer - Theo Van der Meer and Michel Vermeulen
As pension fund trustees work to improve their risk/return profile and diversify their assets, they also seek greater transparency. By splitting investment management from risk management and reporting, some innovative service providers could offer them just that. Theo Van der Meer and Michel Vermeulen share their views on diversification with FDE.
Pension fund behaviour is changing. Diversification is of prime importance, but there is also a shift in focus from outright performance to risk/return ratios as they seek more clarity in deciding which risks to accept. Many are looking to reduce duration risks in their portfolios by using liability driven investment (LDI) and the use of derivatives is set to increase further.
In these times of transition, pension funds are also looking for service providers that can take on sophisticated fiduciary management.
The strengthening interest in fiduciary management services is a trend that originates in the Netherlands, where the growth in fiduciary assets continues to accelerate. Pension funds in the Netherlands amounted to €850bn in 2006 and are estimated to reach €1,200bn by 2025. At present, around two-thirds of the total is managed by industrial funds, while company funds account for around 30%, and professional funds are 3% of the market.
So, what does a fiduciary manager do? The answer depends very much on which financial services organisation takes on the role.
The responsibilities of a fiduciary manager to a pension fund are clear – developing a diversified investment strategy linked to the fund’s liabilities, choosing investment managers, controlling and monitoring performance, and risk management. A large investment bank will take on all of these tasks. Other service providers, however, prefer to separate these activities, putting clear water between the people and processes that drive asset management and reporting.
In the Netherlands, where this all began, there is increasing demand for just such a split of responsibilities as pension funds ask for a clearer view of how their investments are performing.
‘There is a clear demand for transparency. Investments should be judged independently and clearly. The responsibility lies with pension funds. They cannot outsource their fiduciary responsibilities. We believe in transparency and good governance,’ says Theo Van der Meer, director of Fidelity Investments International.
Fidelity has been managing funds for nearly 40 years, and has a much respected global research and investment network. Although it arrived relatively late on the fiduciary management scene in the Netherlands, Van der Meer believes that its innovative approach to the sector puts Fidelity in a very strong position to play a role in the global expansion of the market.
Some estimates even suggest that as much as 40% of pension AUM will soon be handled by fiduciary service providers. Blackrock, Goldman Sachs and large local players dominate local markets at the moment, but the offerings differ greatly between asset managers. Fidelity has spied an opportunity amongst this diversity.
Working in combination with external risk managers and consultants, Fidelity believes it can capture market share by providing the building blocks for multi-strategy, multi-asset solutions and provide greater transparency. Fidelity knows it can handle the asset management side, but recognises that it is important to have the performance of its investments evaluated by a respected, independent third-party.
Fidelity goes to great lengths to separate risk management and reporting from its investment management activities. Van der Meer also believes that this approach gives funds more choice in terms of the investment products they can use. Fidelity offers a return portfolio solution ranging from 100% in-house to 100% externally managed funds.
Consequently, clients of its fiduciary management services, which are usually pension funds with over €200m of assets, are able to create a dynamic and diversified portfolio and have great confidence in the reports of its performance.
‘We could present a black box solution to pension funds, like some specialists in risk management and reporting do, but instead we put together best-in-class components to compete with the service offerings of the investment banks. We combine the best reporting systems, custodians and risk management people with our well-known asset management expertise,’ says Van der Meer.
The model that Fidelity has put in place offers clients greater flexibility because of its modular structure that can adapt to the specific needs of each client. Its fiduciary services range from fullservice to the ‘light’ version.
The initial Advisory module includes corporate analysis, setting risk constraints, identifying liabilities and construction benchmarks, and it is always handled by a third party. Fidelity handles strategic allocation and portfolio construction. It also takes care of asset and risk control in the Investment Management module and also offers a reporting service.
Selecting and monitoring investment managers is a vital part of the service package. Combining managers with different styles and risk budgets gives a fiduciary manager the ability to optimise the overall risk/return profile of the portfolio. At the same time, however, it is vital to ensure that external managers execute in line with the agreed investment policy.
The final module – Risk Advisory – includes annual strategic reviews and periodic strategic overlay adjustments, and is once again handed to a third party.
The fundamental concept is to achieve separation of key responsibilities and provide a best-in-class solution supported by a network of specialists.
‘We offer a modular alternative to the holistic approach taken by the investment banks. We work from the bottom up, whereas they work from the top down. In the corporate environment, CFOs want to get rid of liabilities from the balance sheet. They want to put pension liability at arms length. A pension fund can outsource at least one part of the burden to us, such as risk management,’ says Van der Meer.
Facing the future
The ability to form relationships with players in key local markets offers other advantages Fidelity feels will be increasingly important for its clients, especially as the international growth of fiduciary services gathers pace.
‘The advantage of a modular approach is that if we provide a solution to a company in Sweden, for example, we can use local risk management people who understand the market. Our clients not only get our global asset management solution, but also a service that is localised to the rules and regulations of the market in which they operate,’ says Michel Vermeulen, relationship director for Fidelity.
In its new paradigm for fiduciary management, Fidelity also benefits from the ability to remove some of its liability risk and focus on the core activity for which it has built such a strong reputation – asset management.
The clear division of responsibilities in fiduciary management seems to have great appeal for pension funds, and could be an essential feature of fiduciary management in the future. As Van der Meer says, ‘We feel that pension funds need to keep control and responsibility for their assets. If they hand everything over to a fiduciary manager the playing field is not level any more.’