While certain aspects of governance may need to be enhanced when using external managers, this should not necessarily deter pension funds from continuing to use them, rather than build an in-house team, according to Watson Wyatt. The pension consultants say that research conducted by Roger Urwin, global head of investment at Watson Wyatt and Professor Gordon Clark of Oxford University, shows a clear link between the superior performances and strong governance of top funds.
The study identified five main areas where these funds excel. These were:
Risk management; Time-horizon focus on the long term; Innovative capabilities; Clarity of mission; and Effective management of external fund managers and other agents.
The research’s main finding was to isolate 12 best-practice factors as being indicative of future success in meeting institutional goals. Six of these were assessed as being within the reach of most institutional funds, and are called core attributes. These are:
Mission clarity; Effective focusing of time; Investment committee leadership; Strong beliefs, risk budgeting framework; and Fit-for-purpose manager line-up.
Six further global best-practice factors were isolated in the research and described as requiring significant resources including an executive team, usually with a chief investment officer. The research suggests that these exceptional attributes are not easy for most funds to achieve.
They consist of:
A highly competent investment executive; High level board competencies; Supportive compensation; Real-time decision making, The ability to exploit competitive advantage; and A learning-organisation culture.
Paul Trickett, European head of investment consulting at Watson Wyatt says: “The second group of factors may not be easy to achieve, but it is nevertheless something for funds to aim at.”
He suggests that the question could be whether time and effort should be spent on getting this governance right, or spending it on managing an in-house asset manager.
“We believe that in most circumstances investors would be better off spending effort to put in place an executive team to manage fund investment arrangements through a mix of best in class managers, than they would be by spending time to build their own asset management business,” says Trickett.
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