Want to Improve your Portfolio? Look to Big Business, says Towers Watson

(January 28, 2014) — Pension funds and other large investors should look to the corporate sector for lessons on adapting portfolio strategies over the long term, consulting firm Towers Watson has said.

Investors are not always aware of the need for change, which can occur due to complexity, sustainability, and market positioning, the company said.

“We believe that the world is entering a period of significant change in world economies, politics, and capital markets that will fundamentally affect the landscape in which asset owners compete,” said Roger Urwin, global head of investment content at Towers Watson. “Those asset owners whose decision making has become more flexible and efficient at handling uncertainty and ambiguity will be more adept at exploiting the potential opportunities available.”

Examples of this flexibility can be found in the most successful areas of the corporate sectors, Urwin said, as external market conditions regularly drive companies to re-assess their strategy and re-focus their activities due to a variety of reasons.

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“Asset owners are facing the same pressures to adapt to a changing environment,” Urwin said. He cited examples where investment portfolios deemed well suited to today’s conditions were unlikely to be suitable in future.

Investors that have a focus on sustainability can ensure they have adaptive mechanisms in place to avoid any impairment to their long-term mission, according to Urwin.

“Asset owners are increasingly grappling with fresh demands on their governance and decision-making structures to meet their long-term performance goals,” he said. “Organisational change is a useful mechanism by which asset owners can respond to these demands and improve their chances of success in achieving these goals.”

Urwin said some pensions had begun to grapple with their governance structures, while others were being left behind on the issue creating a “best and the rest” scenario.

“While the jury is out on exactly how much value can be added from good internal governance, the case that governance is the principal enabler of good performance is unarguable.”

(January 27, 2014) — Western Asset Management, a unit of Legg Mason, has agreed to pay $21 million in settlements for illegal cross-trading of securities, according to the US Department of Labor and Securities and Exchange Commission (SEC).

The investigation found Western Asset had purchased nearly $90 million of prohibited securities using funds from accounts covered by the Employee Retirement Income Security Act (ERISA), such as Glen Meadow Pass-Through Trust Securities. The fixed-income management firm then saw significant losses in 99 employee benefit plans and investment funds holding plan assets from January 2007 to June 2009.

“Workers invest too much in retirement plans to have them diminished by the very people they trust to grow their savings,” said US Secretary of Labor Thomas Perez. “The department is committed to protecting retirement savings so that more of America’s workers have the opportunity to build nest eggs and live securely when they retire.”

The SEC has mandated the firm to pay $17.4 million to employee benefit plans and more than $3.6 million in penalties. Western Asset had $442 billion in assets under management as of September 2013.

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“The investigation determined that the company’s own compliance system recognized that the terms of the securities prohibited their ownership by ERISA-covered entities,” the SEC said in a press release. “However, Western Asset overrode the system, allowing the accounts to improperly purchase and hold the securities in their portfolios.”

Western Asset also participated in 514 cross-trades involving ERISA accounts, the SEC stated.

From 2007 to 2010, the Pasadena-based firm sold fixed-income securities from client accounts to brokers, only to repurchase the same securities from the same dealers at a mark-up, in a deal that heavily favored the buyers. These disparities in pricing have cost some ERISA-covered accounts $6.2 million, according to the SEC.

“Western Asset violated its fiduciary duty to act solely in the best interest of its plan clients,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi. “Its failure to follow not only the law, but its own rules, cost hard-working employees millions of dollars.”

Legg Mason spokeswoman Mary Athridge said in a statement that the company’s insurance would cover most of the settlement.

“Western chose to settle the matters to avoid the uncertainty, expense, and distraction of litigation,” she said.

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