The UK’s £25bn (€27.1bn) Railways Pension Scheme (Railpen) announced last month that it had hired Ortec Finance for performance attribution analysis.

It is the latest major UK scheme to adopt the Dutch consultant’s attribution model, and it follows Ortec’s appointment to provide a similar service to the entire £256.8bn UK local government pension scheme (LGPS). It also counts two of the UK’s biggest pension funds – the Universities Superannuation Scheme and the BT Pension Scheme – among its clients.

IPE spoke to Ortec’s UK managing director Lucas Vermeulen to find out what some of the UK’s (and Europe’s) largest investors were getting from the Rotterdam-based advisory firm.

“If you are only analysing the reports from your asset managers, calculating returns compared to their benchmarks, that doesn’t take into account the decisions made before money is handed over,” Vermeulen says. “You have to analyse the bigger picture.”

At the biggest schemes, which typically employ more complex processes, there are “multiple decision makers all contributing to overall investment returns”, he explains. For proper attribution of the value added at different points of the process – and to assess efficiency – schemes must “follow the flows, calculate profits and losses, and then you can calculate the values of all the agents in the process”.

The approach has its roots in the early 1990s, when Dutch oil production giant Royal Dutch Shell approached Ortec seeking help with performance attribution within its pension schemes.

“They were very early in understanding that you can’t use a bottom-up approach,” Vermeulen says. Instead, a “top-down” overview of the entire investment process was agreed to be more appropriate.

He continues: “Custodians have [records of] all the transactions, but they don’t have the knowledge or understanding of how and why the transactions are produced. You have to go really into detail about how decisions are taken: look into complicated overlay structures, what you do with currency investment. When you can measure, you can start managing.”

In making this move, Shell and the other schemes that followed this process have shifted away from focusing on provider reports and a “hiring and firing” approach. Instead, trustee boards and management committees have redirected their attention to longer-term themes and adopting the best internal structures to achieve their objectives.

For example, when shifting assets from a UK equities manager to a US equities manager – regardless of the size of the investment involved or even the decision to manage in-house or externally – the pension scheme has to understand why it is making the decision and what value it is likely to provide, Vermeulen explains.

“If you have a few managers that have reported decent performance compared with their benchmarks, in aggregate their contributions on a performance basis are strong, so you would assume you’ve done very well,” he says. “But overall the result could still be disappointing because the timing for moving money around could be bad. You can’t tell that from manager reports.”

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