Our focus is on tying together the investment strategy and the funding strategy.
Whilst we have full asset liability tools available this is often not appropriate for other than very large schemes. A sensible pragmatic common sense approach to investment consultancy is often most effective. This is typical of our style which generally aims to avoid Consultancy Fee Generation Projects (CFGPs).
History shows that well over 90% of a scheme’s investment return comes from its asset allocation strategy. Only a small part, if any, comes from the selection of investments within each asset class. Within an asset class, it is difficult for an active manager (with the higher fees that they need to charge to cover their research costs) to produce a return greater than that achieved by passively investing on an index tracking basis at a much lower cost. Few managers’ long term results, when reviewed on a net of fees basis against the appropriate index, show continued outperformance and most show underperformance.
With this background, our focus is very much on the asset allocation and tying this in with the scheme’s actuarial liability profile and funding level as well as the trustees and employers attitude to risk and risk budget. We are happy to work with trustees and employers to review and continually assess asset allocation strategies.
For most of our clients, however, we go further than this and look at introducing an element of target/absolute return funds into their investment strategy. We do believe that active management of asset allocation can add value. Managers can change asset allocation on a daily basis rather than needing to wait for next trustees meetings to take advantage of market opportunities. These funds often incorporate some exposure to alternative asset classes on a simple and cost effective basis.
Target return funds are not to be confused with hedge funds (which we do not generally deem appropriate). We were among the first to promote target return investing and our regular target return fund surveys cover all the main institutional funds and show our independent analysis of performance and (perhaps as importantly) our own volatility analyses.
A target return based approach allows a scheme’s investment strategy target to be set on a basis consistent with the scheme’s actuarial funding strategy. For example, the scheme may fund on the basis of an inflation plus 3% pa discount rate alongside an investment strategy return targeting inflation plus 5% pa. This gives the Regulator required prudence margin implicitly.
Investment consultancy clients receive regular reports from us (either quarterly, half yearly or annually to suit) which cover the performance of the scheme overall split between each manager and asset class. As well as our commentary on performance and updates on any investment research meetings we have had with the relevant managers, we also review the volatility of the managers performance to ensure that there are no unplanned risk levels. These reports also contain a broad actuarial funding update to show the effect of investment performance against the actuarial target and the effect on the scheme’s funding level.