Large Funds Shun Outsourced Investment

Small pension investors are warming to outsourced or fiduciary management approaches, but refusing to relinquish final control; large investors are moving away entirely.

(March 12, 2012)  —  Fiduciary managers and consultants offering investment outsourcing are picking up more business from small to mid-size pension fund investors but are failing to take ultimate control of the larger funds, research this month has found.

By the end of 2011, the number of smaller schemes employing a fiduciary manager or outsourcing expert had grown from 15% to 26% since 2009, Russell Investments said in its latest governance survey.

Further up the asset-size scale however, larger funds are delegating more of their investment decisions to a separate committee due to time constraints and rejecting the idea of fiduciary management, the survey found.

Some 7% of larger funds used fiduciary managers at the end of 2011, compared to 9% in 2009. Almost half of these funds had a separate investment committee, the survey found, compared with just 38% in 2009.

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These funds could delegate more of these committees’ responsibility, John Stannard, Head of Consulting at Russell Investments.

He said: “Today more investment committees are ‘watchdogs’ rather than ‘executioners’ and we’d argue that more of an execution focus will help.  For example, the research indicates that 75% of trustees still retain direct control of manager selection; this is something that most funds can and should delegate to an investment committee or a third party.”

Stannard said many investors failed to appreciate the practical challenges of implementing an agreed investment and governance strategy, despite acknowledging it would lead to better outcomes.

Additionally, across the asset sizes, investors are less keen to delegate ultimate responsibility for execution to an investment committee or third party.

The Russell Investments survey said: “Despite the increased prevalence of investment committees and fiduciary management arrangements [for smaller funds], there is very little evidence of empowering those entities to take investment decisions at any level. In fact, the degree of delegation has declined substantially relative to the 2009 survey, with respondents indicating that trustees retain sole decision-making authority in most instances across a range of different decisions.”

Last month, aiCIO’s annual investment outsourcing survey found less than half of all funds that had delegated at least some of their decision-making (if not execution) to a third party manager were less than ‘extremely satisfied’ with the performance of their chosen provider.

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