Trustee Guide Part III - How Performance Is Calculated

This is the third in a series of short notes that explain how the IC Select Fiduciary Performance Management (FM) Standard works and how trustees can benefit from the information. This note explains why return relative to liabilities was chosen as the performance basis for the fiduciary manager performance standard.

It was essential that the performance measurement methodology used for the standard had two key attributes. Firstly, it had to measure performance according to what is most important to trustees and, secondly, the results for each fund had to be capable of being combined together into groups of funds, to give an overall impression of how the fiduciary manager was doing, and to avoid cherry picking by managers of the best track record.

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Part II - Aligning the Standard with trustees needs

This is the second in a series of short notes to be published over the next few weeks that explain how the IC Select Fiduciary Performance Management (FM) Standard works and how trustees can benefit from the information. 

The IC Select Fiduciary Management Performance Standard was, as the name suggests, initially designed and developed by advisory firm IC Select. 

Soon after the creation of the standard, a decision had to be taken as to whether this intellectual property should be exploited by IC Select to provide it with a competitive advantage in the selection and oversight of fiduciary managers - or whether it should it be developed as an industry standard.

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IC Select Fiduciary Management Performance Standard

Background

This is the first in a series of short notes to be published over the next few weeks that explain how the IC Select Fiduciary Management Standard works and how trustees can benefit from the information.  This note focuses on the background to the Standard.  Subsequent notes will cover:

  • Aligning the Standard with Trustees’ needs
  • How performance is calculated
  • Making sense of the composites and what to focus on
  • Understanding the standardised performance information
  • The impact of different methodologies for calculating liability benchmarks
  • Full and hedge adjusted liability benchmarks

The FCA and CMA have highlighted that trustees are not receiving the necessary information to allow them to assess performance and judge value for money when selecting fiduciary managers. This is one of the areas that is currently being looked at in detail as part of the CMA’s Investment Consultants Market Investigation which will report its finding in July 2018. 

These issues with fiduciary management performance are not new and have been widely discussed in recent years.

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There are no gift receipts in fiduciary management

This year I left my Christmas shopping to the last minute.  I would not recommend it.  All seemed well on Christmas Day with the usual smiles and joviality.  However, on Boxing Day the first hint of problems started to emerge. “Do you really think red suits me” was the opening gambit, followed shortly afterwards by “I am not sure I wanted a sweater anyway.”  All was not lost, as armed with the gift receipt, the sweater was soon replaced with a more appropriate item and harmony was restored.

Trustees may not be so lucky.  They do not get gift receipts that allow them to correct any problems from an agreement entered into in haste.  Nowhere is this truer than in agreeing a fiduciary management contract. 

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Trust me, I'm an expert

Is there a problem with investment consultants and actuaries already working with pension funds taking on additional responsibility as fiduciary managers?

The head of European distribution of one of the fiduciary management firms does not think so.  In a recent interview with IPE he said “a fiduciary mandate relied on a long term relationship, requiring a company trusted by pension trustees.  If you think from the investment consulting universe, aspects you’re buying from fiduciary management are those skills that exist in the investment consultant industry – for example, asset allocation decisions, decisions around liability management, plan design and implementation.”

If this were true and these skills do exist, then the trusted relationship would indeed be good reason to stay with the same provider.  The question is what proof is there that the statement is worth accepting or indeed what evidence is there to the contrary?

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