Cardano Challenges Outsourcing Competitors with Five-Year Results

(November 15, 2013) — Fiduciary manager Cardano has published its first five-year fiduciary management results, showing its clients outperformed their peers on a liability base by 30 percentage points, and thrown down the gauntlet to competitors to reveal their figures.

The Anglo-Dutch firm, the clients of which include tyre-maker Pirelli, said this result had been achieved with just a third of the risk of other pensions that had not followed their system. Cardano highlighted the difficult investment conditions its clients and the wider market had experienced over the past five years.

“Over the period, levels of risk have been about a third of the industry average and broadly equivalent to portfolio with a mix of 90% bonds and 10% equities,” said Richard Dowell, head of clients at Cardano UK.

Cardano clients had steady outperformance of the liability benchmark at 2.3% per annum (net of fees). This compares to the average pension fund, Cardano said, which showed an estimated 2.1% per annum decline over the same period. The compound result is a 17% improvement for its clients compared to a 14% decline across the wider industry, representing more than a 30 percentage point difference.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“We publish our track-record each year and encourage others to join us to create transparency within the fiduciary management industry,” Dowell said.

There is scant data on the performance of fiduciary managers and other outsourced providers. Pick up the December European edition of aiCIO for a full investigation into inadequacies of the market.

Cardano, which collected the prize for innovation in fiduciary management at the inaugural aiCIO Innovation Awards, works with more than 40 major European pension funds and insurance companies. In the UK, Cardano works with pension funds with assets totalling £50 billion, of which £10 billion is managed on a fiduciary basis.

For more information on the aiCIO European Innovation Awards, taking place on May 15, 2014, email epfeuti@assetinternational.com . For European readers, to subscribe to receive the European edition, click here.

(November 15, 2013) — Concentrated active investment strategies can create equity alpha, but it’s imperative to implement them in the right way to avoid excess risk, according to Hewitt EnnisKnupp.

Several consultants have extolled the virtues of high conviction or concentrated equity strategies, which sees managers invest in fewer stocks but employ greater levels of manager skill to create alpha.

Hewitt EnnisKnupp carried out research in 2012, and found the number of highly skilled active managers who did managed to produce solid alpha returns has fallen from 20% in the 1990s to around 2%-3% today.

If you’ve managed to seek out one of this 2% to 3%, the challenge then becomes how best to implement their strategy, since concentrated alpha equity often result in higher levels of risk.

For more stories like this, sign up for the CIO Alert newsletter. 

Hewitt EnnisKnupp partner Matt Clink said there were three steps investors should follow: firstly, to spend time selecting the potential individual active managers; secondly, to combine those managers in a complementary way; and thirdly, to apply passive management if desired.

“Employing global equity mandates is the most practical approach for small to mid-sized institutional investors seeking to build a multi-manager portfolio with high active share, as it requires fewer managers than approaches with different mandates for regional and capitalization-focused subsets of the market,” said Clink.

“For larger investors, utilizing regionally or capitalization-focused strategies is also feasible. Each manager should have a high active share relative to its benchmark, i.e., an active share greater than 75% (or no more than a 25% overlap with the benchmark).”

Combining the managers doesn’t mean picking ones with the same investment strategies, Clink continued. But it was important to analyse the reduction in active share as each manager is added to the portfolio to avoid closet indexing.

The third and final step is to determine how much passive management to add to the portfolio. Passive management is used to lower cost, reduce tracking error, add a strategic regional or capitalization beta tilt, and to improve liquidity, Clink explained, although in some cases it might be abandoned completely if the investor wants to maximize their potential alpha and is comfortable with the fees.

For the full report, click here.

Hewitt EnnisKnupp wasn’t the only consultant to find value in high conviction portfolios. Data analysis carried out by Inalytics in April 2013 found diversified equity portfolios underperformed highly concentrated ones by almost 400 basis points.