Towers Watson’s Pieter Steyn tells Louise Farrand why trustees should feel that delegating is not an admission of defeat

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Do trustee boards sometimes feel like they are admitting defeat by delegating some of their investment decisions?

Delegating is absolutely not an admission of failure. It’s a recognition that times have changed.

Towers Watson’s central outlook is that markets are going to deliver reasonably low returns on account of continued debt overhang. The risks around this central view are also more likely to manifest on the downside than on the upside.

We see fiduciary management as a means of adding resource to help you to protect your scheme’s investments for this set of scenarios. It’s like having your own investment office. But why would you consider this?

The simple path involves investing in equities and bonds, in a relatively passive way. But that’s not the most efficient way of investing. There are lots of other tools you can use – like liability hedging – that can add value to your portfolio, but it requires resource to implement successfully.

An investment portfolio that is concentrated around one or two asset classes is also more likely to sustain some kind of impact, whereas a well-balanced portfolio with exposures to more, smaller and diversifying risks is likely to run through a challenging economic cycle much more effectively.

But how do you choose from the multitude of products and ideas out there? And what if none of them are quite right?

That’s where the value of a fiduciary manager like Towers Watson comes in – being your investment office and adding value over and above an equity and bond portfolio.

What Towers Watson does in fiduciary management is look to spread the number of risks that we take and not have any single risk dominate a portfolio. We also engage with the investment management industry to build products that really work for our clients rather than for themselves.

For a trustee board that has a packed agenda, it is a difficult and daunting prospect to have to deal with lots of underlying manager appointments. Fiduciary management takes away that burden.

Fiduciary management therefore effectively gives trustee boards their own investment office. You don’t have to build or sustain a team inside your own organisation, but you still have discretion to decide which of the activities you delegate – and trustee boards typically delegate asset allocation and manager selection.

How much access to a fiduciary manager do you get as a scheme?

My clients say they feel it is like having an extension of their own organisation. They can simply pick up the phone any time.

How do you successfully work with schemes that have different investments and philosophies?

We spend as much time as possible understanding what each client is trying to achieve. Is it trying to buy out? Or does it want to run the fund on into the future?

The next most important thing is to understand a scheme’s investment beliefs. If we make decisions that are in conflict with what our clients believe, there will be trouble ahead.

We spend lots of time trying to understand the client’s beliefs then map them onto our own investment philosophy and beliefs. We can then build a beliefs-consistent portfolio.

That is the reason why some portfolios look different between clients, to reflect where their own belief sets overlap with ours.

In many cases that does mean we end up exiting some existing strategies for a new client and entering some new ones – that is the very proposition of a fiduciary manager: professional execution, better diversification, better hedging. But we are also happy to retain some of the investments already present in our clients’ portfolios, where they are successful and consistent with a client’s mission and beliefs.

Pieter Steyn is head of Towers Watson’s delegated investment services in the UK. To read Towers Watson’s trustee guide to fiduciary management, click here.

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