Outsourced Investment is Uncontested and Unmeasured, says KPMG

A worrying trend has taken hold of UK outsourced investment/fiduciary management, the consulting firm has warned.

More than 80% of new fiduciary or outsourced mandates awarded in the UK in the past year were won on an “uncontested basis”, according to consulting and auditing firm KPMG.

These mandates were awarded to companies without an alternative provider being put forward to act as a comparison, as the trend to outsource investment responsibility continued apace in the UK.

“Two numbers stand out to me in [our] 2014 Fiduciary Management Survey,” said Anthony Webb, head of fiduciary research at KPMG. “The first is the astonishing 44% growth in the number of full delegation fiduciary management mandates over the year. The second is that of these 92 new mandates, over 80% of them were won on an uncontested basis—in other words: in eight out of 10 cases a quote was only provided by the ultimate mandate winner.”

Webb told CIO that KPMG had harboured concerns that pension funds were being offered just one option—usually by an incumbent provider—for some time, but this worry had been exacerbated by the rise in the number of mandates.  

Some 81% of mandates were awarded with no tender process or interviews with other providers. In 7% of cases, the client ran its own restricted tender process; in another 7% of cases, an open market tender was run by the client; in just the remaining 5% of cases was a full open market tender run by an independent third party, KPMG’s survey showed.

“Ideally the number of uncontested mandates would be zero,” said Webb. “But many trustees worry about the time aspect and often have the perception that appointing a fiduciary manager means just doing the same thing, but with less signing of contracts. This is not the case. They have to understand what they are investing in and keep an eye on the fiduciary manager.”

Last week, a letter from an official at the US Department of Labor outlined concerns about incumbent providers of advice offering investment management services to their pension clients. The letter said these companies may be breaking US federal law.

Back in the UK, the KPMG survey also highlighted the lack of available measurement metrics in fiduciary management.

Webb said although it would be difficult to create an industry standard, as each investor would ask for a personalised metric, it was important to at least be able to see how well an outsourced investor chose underlying fund managers, based purely on performance.

However, the survey showed that already there had been a movement by pensions who were either dissatisfied with performance or wanted something different from their providers.

This year, some 3% of schemes employing a fiduciary manager changed providers. KPMG estimated this number would rise to 36% of pensions switching by 2017.

Related content: CIO’s 2014 Outsourced Chief Investment Officer Survey & Is Your Consultant Breaking the Law?