Why is an industry standard needed?
Performance measurement of an appointed fiduciary manager is a relatively straight-forward issue. Performance will be measured against a client’s bespoke benchmark with the impacts of asset allocation, hedging and stock selection typically highlighted.
However, when trustees are seeking to select a fiduciary manager the performance information they are presented with is often of little value in helping them understand how the fiduciary manager will add value for their scheme.
The reason is that each fiduciary manager provides performance information for a selection exercise using a different approach. For example:
- Some fiduciary managers show the performance of a ‘cherry picked’ fund or funds,
- Performance is shown for different time periods,
- Methods for calculating performance and risk vary (e.g. some are gross of fees and others net),
- Performance track records displayed may not be relevant to the fund requirements of the trustees of the tendering fund,
- Performance is shown for ‘composites’ with a wide range of different types of fund included in the composite,
- Performance is benchmarked against different industry ‘model’ funds,
Despite these problems trustees often appear to place a disproportionate weight on performance data in the selection process and are often not aware of the implications for their decisions of the different approaches being used.
Many of these problems can be solved by moving to a standard basis for classifying funds, calculating performance and displaying performance. Consequently, IC Select have engaged with the major fiduciary managers to agree a standardised methodology for data calculation and presentation of fiduciary management performance information for selection exercises.
The introduction and adherence to the IC Select Fiduciary Management Performance Standard will put trustees in control of the information they receive, avoiding the potential for cherry picking funds, and provide them with confidence that the performance data provided has been calculated on a consistent basis and is being presented in a standardised manner to improve their understanding.
What are the objectives?
- To measure the added value provided by fiduciary managers.
- To improve transparency and consistency of performance information across the fiduciary management sector.
- To standardise the calculations and presentation of fiduciary management performance data.
- To put trustees in control of the information they receive and, consequently, improve confidence in the decisions they take.
- To allow an open access structure that is free to use for all industry participants.
What are the key points?
The IC Select Fiduciary Management Performance Standard is a standard basis for classifying funds, calculating performance and risk, and displaying performance. The formation of composites is at the heart of the standard:
- Every pension fund managed in a fiduciary basis is to be placed in a composite.
- Composites should be constructed based on client funds that have similar return objectives, risk tolerances and hedging constraints rather than identical benchmarks.
- Each fiduciary management firm should maintain a listing of all composites, their objectives, risk parameters and hedging constraints, the number of clients in the composite, the assets under management and the date the composite was first constructed.
- Performance calculation should be based on the return relative to the benchmark net of fees. For most schemes the benchmark will either be the liabilities (or gilts) or a fixed asset split with a hedging constraint. Where the benchmark is a fixed asset split, the fiduciary manager should also record how the performance of that fund, net of fees, is expected to compare to the liabilities (for example, liabilities plus 2%).
- The measure of volatility to be used is the annualised standard deviation of returns relative to the benchmark, net of trading and other costs but before deduction of the fiduciary manager's fees and sub-adviser fees.
- Maximum drawdown is defined as the maximum fall from one peak to the next trough, it will be time dependent and will be measured over different time periods.
What will this achieve for Trustees?
This provides trustees with many advantages:
- any trustee board carrying out a fiduciary management selection exercise can request the performance information on the IC Select Fiduciary Management Performance Standard direct from the fiduciary managers,
- each fiduciary manager will have a list of core performance composites on different risk and return characteristics for the trustees to select from,
- as performance composites are calculated on average performance for a group of clients, it prevents the fiduciary managers from reporting only their best performing funds,
- when requesting performance information on the IC Select Fiduciary Management Performance Standard, trustees can have confidence that performance has been calculated and audited on an industry standard basis,
- trustees can be confident that the information they are getting will be presented in a standardised format.
How will the standard be audited?
The IC Select Fiduciary Management Performance Standard requires firms to have their composites externally audited. IC Select intends, at its expense, to verify firms' compliance with the standard as part of its standard due diligence research. It is expected that this audit will be no more frequently than annually.
What is the timetable?
The IC Select Fiduciary Management Performance Standard was launched in April 2018. For link to press release please click. It has been backed by 14 providers including the world's largest consulting firms Aon Hewitt, Mercer and Willis Towers Watson. Others include BlackRock, Cardano, Charles Stanley, Goldman Sachs Asset Management, JLT Investment Solutions, Kempen Capital Management, Legal & General, P-Solve, Russell Investments, Schroders and SEI. trustees and third party evaluators can now request data direct from these firms.
The details of the guidelines may be found on here.