Fiduciary management does not mean buy-and-hold
04 Feb 2019
In many (if not most) cases fiduciary management is effectively an asset management solution, either a fund of funds or a multi-asset offering including asset allocation. That puts fiduciary managers directly in competition with all other asset managers (of which there are many) providing such services.
We all know that fees are a fundamental issue for pension schemes, and duplication or the payment of unnecessary fees is something all trustees should address. I don’t want to get involved in the debate about the level of fiduciary fees here, but there is an important issue which merits (indeed requires) trustees’ attention.
The key point to recognise is the increasing maturity of schemes and the move away from growth assets to income and protection assets. This makes strategic sense as the need to generate income and avoid being a forced seller of assets becomes of crucial importance, while protection is also required against adverse balance sheet impacts caused by movements in yields.
The issue is that income assets are held for their contractual cashflow characteristics, including the repayment of capital at the end of the term. As a result, income assets are often buy-and-hold assets, and the need for an asset manager is in the selection of the underlying credits. Unless something goes wrong, the asset will be held to maturity with proceeds paid away to meet scheme cashflow. So there is a need to delegate to an underlying credit selector, but not to pay an additional layer of fees for someone to duplicate that role.
The same applies with LDI portfolios. Employing an expert to implement the agreed strategy, and to actively manage components of it, is appropriate. But paying an additional layer of asset management fees on top of that is neither necessary nor advisable.
So while increasing maturity means trustees have greater need for buy-and-hold strategies, they should increasingly recognise that they don’t need to double up fees with a buy-and-hold fiduciary.