How Providers can take a lead in investment governance.

The technical bitTruth

There are very few people who really understand the operational issues of fund management. Fund managers are paid to pick stocks, they are not paid to execute the buying and selling of those stocks, nor to provide currency hedging when investing in overseas markets nor to ensure that the counter parties on derivative trades are suitable.

Behind fund managers are custodians, brokers and dealers who provide these ancillary services. The supply chain is so complicated that it is hardly surprising that fund managers lose track.

Conventional analysis of managers concentrates on the stockpicking abilities of the manager but ignores the mid and back office functions on which the fund relies.

But the difference between a good and bad “round-trip” when a fund manager buys and sells can be as much as 0.4% (40 bps) of the transaction.

We are living in a world where fund managers are targeted to achieve 2% real returns (eg beat inflation by 2%). That 0.4% is 20% of his targeted real return!

When fund managers were regularly rolling in double digit returns and sometimes double digit real returns, there was little scrutiny of these inefficiencies, they could be laughed off over a glass of Merlot at the lap-dancing bar (all expenses paid by the broker).

But in this new world where the member pays (rather than a sponsoring employer), people are getting a little more agitated about “what makes for good” in these matters.

And a new breed of forensic analyst is springing up, a breed of analyst that is paid on a no-win no fee basis and whose job is not just to point out bad practice but to fix it. In Germany, Novarca, a firm of such analysts, operates a kitemark for fund managers who have accepted their scrutiny and rectified inefficiencies.

Fund managers see the sense, ok they need to pay and pay big time (these analysts take 50% of year one savings) but what they get for the fee is better fund performance from day one and continued monitoring from the analysts to make sure that the bad practices don’t come back.


The Provider bit

Whether it’s NEST or NOW or Legal & General or Zurich or any other of the workplace pension contenders THIS IS FOR YOU.

You are under scrutiny for your governance. You are being asked the question “do you know what your fund managers are doing?”. I suspect that you have a pretty good idea of how they pick stocks, the style of management they employ and you keep tabs to make sure that they do what they say on the packet. That’s good governance.

But do you know if they are any good operationally? Have you a handle how they manage their derivative programs, their FX, how they execute trades to minimise spreads and avoid being taken to the cleaners on market timing issues?

When I worked for a platform manager, none of us had the first idea about any of this (and I only packed it in 8 years ago). I suspect that this blog is total gobbledygook to the majority of those who sit as trustees of the mastertrusts or on the governance boards of the GPPs we are trusting for our retirement income.

My friends at Novarca (a Swiss company) tell me there are countries that no what they are doing (the Dutch in particular) and there are some managers who have perfected operational practices (step forward PIMCO), but they tell me that the UK is lagging.

Now I’ve been banging on for some time about poor execution, dodgy stock-lending practices, poor disclosure and a general failing of trustee knowledge and understanding about these things.

But it’s no use moaning, we need to do something about it and this is what I am going to do.

I am going to challenge every provider I meet over the next 3 months to tell me what their policy is to scrutinise the back office policies of the managers they use in their defaults.

Whether these managers be affiliates like LGIM and SLIM or disconnected , like the plethora of managers employed within the NEST default, I am going to challenge them to tell me what they have, are and will do to ensure that the managers are executing to the best standards.

And I fully expect them to ask “what are best standards?” and “how can can I find out?” and “how can I put things right if they aren’t”.

And I’m going to tell them what they need to do. I’m going to tell them to get a forensic analyst like Novarca down to the managers they use and require the manager, under the usual rules, to open their books to the analyst.

And I’m expecting the analysts to provide a report stating whether or not there are savings in operational costs to be harvested.

And if it turns out that there are improvements that can be made which improve fund performance, I’m going to insist that those improvements are implemented.

And if those changes cannot be implemented by the fund managers (because they don’t have the skill set) I’m going to insist they are implemented by the analysts (on a no win no fee basis).

And if trustees and investment governance committees don’t agree to speak to their managers, or if the managers won’t agree to open their books to the forensic analysts and/or implement themselves or through the analysts I’m going to get very interested in why not.


There is a good reason for why not. At the end of the day, neither the fund managers nor the trustees, nor the platform managers or the sponsoring employers are paying for any muck-ups at an operational level. The cost of the mistakes are being paid for by the members of the schemes out of reduced fund performance.

I am one such member and I have no idea whether my managers are doing a good job.

And if i find out that neither do my trustees or the platform manager (and their governance committee) nor my employer (and its governance committee), then it looks like its down to me (and you).

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to How Providers can take a lead in investment governance.

  1. I wonder how many people actually understand how their fund managers trade. What percentage of the trades fall into different categories, high-touch brokers, electronic marketplaces, darkpools etc? Even more, how many fund managers are willing to provide an analysis of their trading? All factors for the investor both large and small to consider – costs matter.

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