A series of questions about investment consultants' relations with pension funds was posed to the NAPF investment conference by Paul Audu, investment manager of the £500m ($835m) London Borough of Hackney pension fund. Who manages who? Have trustees unknowingly ceded the right to set the agenda to consultants? Why are investment consultants not subject to the same rigorous selection process faced by fund managers and custodians? To whom are consultants accountable? Should consultants' quality of service be measured and reported?"

Some fund managers, he claimed, no longer bothered to compete for mandates if consultants were involved in the search. "The soundness of consultants' research is not in doubt. However the herd-like concentration of pension fund assets raises an important question about their independence." Over 90% of local authority pension fund business was controlled by the top consultants, Audu pointed out. The continued overconcentration of assets with certain fund managers and the influence of consultants could lead to pension funds bearing the brunt of costly mistakes. Placing a large portfolio with a large manager may be a 'safe bet' from the consultants' viewpoint. "But the consequence of making it the norm is that many extremely talented small firms are neither seen nor heard at beauty parades," he said.

He added that trustees, fund managers and custodians were accountable, but "in the wonderful world of the consulting industry, getting it wrong is somebody's else's funeral". Criteria for determining the quality of their service should be firmly established, he said.

When reviewing relationships with consultants it was essential to be committed to the process, advised David Birtwistle of Lucas Verity, who is based in Buffalo in the US. "To ensure the process is rigorous, it is important to have some method of measuring or comparing the relative strengths and merits of different consultants. If it can't be measured, it's not worth doing."

But the measurement system must be weighted according to the client's view of which services were most important.There needed to be an agreed set of service standards against which performance can be monitored.

Speaking from the floor, Roger Urwin of consultants Watson Wyatt said that he agreed that consultants' performance needed to be measured, but this could not be by means of a single figure. "Consultants have not been accountable." He felt that they should be more so if manager selection went wrong.

Passive management could go to 70-80% of assets under management without introducing serious market inefficiencies, Lindsay Tomlinson, chief executive of Barclays Global Investors in London told the conference. "This was so long as the index compilers are vigilant." He said that if markets went entirely passive they would become inefficient and passive management was self-limiting. "All academic work suggests that the activities of a small number of active managers working at the margin will keep an investment market broadly efficient." In the past 10 years indexation had moved from being virtually unknown in the UK to the position where around 20% of UK pension assets are now on a passive basis, said Tomlinson.

Frank Russell manager Don Ezra said: "It will be very interesting to see how fast European equity markets converge and to take a look at different valuation measures, such as price to book ratios in different countries and see whether they are starting to converge." When they did, investors would look at sectors rather than geography. "Take a look over the next few months, it could be quite rapid." Looking at the question of 'home bias', where funds would have more invested in one local company than in whole non-domestic markets. How can this be justified? Ignoring the liability and concentrating on assets, the issue was one of additional costs when investing in non-domestic securities. But if these costs amounted to say 25 basis points, it was amazing the tilt it gave in favour of domestic assets, he said.

Examining the question of hedging currency exposure, Adrian Lee of JP Morgan Investment Management in London argued that a policy of hedging was appropriate when the liability side was taken into the models. "The essential reason for this is that when foreign assets are hedged they become more like their domestic counterparts, both stocks and bonds, the random unrelated risk of currency is eliminated." In a minimum funding requirement liability context, strategic currency hedging appears appropriate under a wide range of assumptions for the typical UK investor. "In an asset-only context, strategic currency hedging is sensitive to expectations and individual risk preferences." Fennell Betson"

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