Fiduciary Management E-Book

A. van Nunen

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 456

Veröffentlichungsjahr: 2011

Beschreibung

Fiduciary Management offers an in-depth explanation of every facet of this fast-growing approach to organizing the management of an institutional investment portfolio. Expert author Anton van Nunen begins by outlining the historic shift that has brought this strategy to the attention of the investment community and quickly moves on to illustrate fiduciary management in practice; giving advice in terms of asset-liability modeling and financial markets, constructing portfolios, selecting and overseeing investment managers, benchmarking and performance measurement, and reporting.

Leseprobe

Contents

Foreword

Preface

Chapter 1: The Pendulum Swings Back in Asset Management

The Forces of History

The Rise of Modern Portfolio Theory

Support for Shares

The New Paradigm

The Rise of Indexing

Discontent with the Paradigm

The Need for Fiduciary Managers

Chapter 2: Pension Plans: The Principal Setting for Fiduciary Management

The Historical Idea of Pensions

A Patchwork of Pension Provisions

Organization and Regulation of the Pension System in several OECD Countries

Similarities and Differences

Commonalities on the Asset Side

Chapter 3: The Role of the Fiduciary Manager as Chief Advisor

The Asset-Liability Study

Thinking through Risk and Return

Portfolio Construction

Selecting and Overseeing Investment Managers

Measuring and Benchmarking

Education

The Trusted Counselor, the Fellow Fiduciary

Chapter 4: Shaping the Fundamental Investment Policies

Liability-Driven Investments

Choosing an Active Investment Policy

Integrating Active Policy in the Overall Portfolio

Completion Account as a Necessary Adjunct to Active Policy

The Fiduciary Platform to Integrate Active Policy in the Overall Investment Portfolio

A Special Case: Bridging the Duration Gap

What a Fiduciary Manager’s Report Looks Like

Chapter 5: Asset-Liability Modeling and the Fiduciary Manager

The Role of the Fiduciary Manager

The Asset-Liability Model (ALM)

Policy Instruments Used in Asset-Liability Modeling

Calculations to Cope with Uncertainty

The Crucial Role of ALM

Asset-Liability Modeling in Practice

Policy Changes

Where Does Fiduciary Management Fit In?

Chapter 6: Fiduciary Management In Practice—Portfolio Construction

Defining Appropriate Asset Classes

Hedge Funds: Weighing the “New” Alternative

Burrowing In: Defining Sub-Allocations

Thinking about Style

Apportioning the Fixed Income Portfolio

Measure for Measure

Formulating Mandates for Managers

Chapter 7: Horses For Courses—Selecting And Overseeing Investment Managers

Creating the Beauty Parade

Investment Performance

Investment Process and Philosophy

Investment People

Operational Risk

Managing the Beauty Parade

Managing the Transition

Overseeing the Managers

Chapter 8: Performance Measurement and Benchmarking

Why Has Benchmarking Grown More Important?

The Use of Different Types of Benchmarks

Liability-Driven Benchmarks

Strategic Benchmarks

Detailed Benchmarks in the Context of Active Investment Policy

Active Overlay Management

Rebalancing

Measurement of Active Policy

Chapter 9: The Fiduciary Manager Experience in the Netherlands and Beyond

Changes in Investment Policy

Changes in the Role of a Fund’s Investment Committee

Changes in the Breadth and Depth of Discussions with Asset Managers

Changes in the Communication Process

Changes in the Level and Structure of Costs

Changes in the Importance of the Custodian

Overseeing the Fiduciary

Future Developments of the Market for Fiduciary Services

Beyond the Netherlands

Fiduciary Management Plus

Chapter 10: Summing Up Fiduciary Management: What It Is and Is Not

Goals, Policy, and Responsibilities

Fiduciary Management Can Enhance Productivity

What Fiduciary Management Is Not: A Simplification

Comparisons with Other Investment Management Models

The Concept’s Claims

Appendix: Suppliers of Fiduciary Services

Bibliography

Index

More Praise for Fiduciary Management

“Fiduciary management is an answer to the increasing complexity of the investment environment in which trustees of pension funds and endowments have to fulfil their role. The step from outsourcing individual mandates to appointing a fiduciary manager is a logical one in a process which leads to ever greater demands on the professionalism of trustees. This book helps to understand the complexities and pitfalls of institutional asset management and gives a clear answer to basic questions as what are the key responsibilities of a board of trustees and how to take care of them. Organizing beauty parades is not one of them. Hiring a fiduciary manager might help.

Institutional investment management is a profession and should be organized as such. This book shows what professional management is all about and why you should not enter this field without the help of a fiduciary manager. Reading this book is a must. I can highly recommend it.”

Jean Frijns, professor of investments, University of Amsterdam, The Netherlands, chairman of the Dutch governmental commission on governance

“Fiduciary Management is a monument to good pension fund governance and transparency. The author demonstrates enormous knowledge of the unique pillar of services to pension fund boards or trustees which Fiduciary Management can be. A must for all those involved in servicing pension funds.”

Koen De Ryck, managing director of Pragma Consulting N.V., Belgium

“Not having been able to read the book as carefully as I should, my conclusion is that this is a nice book on a rather new phenomenon, which will become a reference book for a lot of people taking complex decisions which are needed constantly nowadays in order to create an optimal pension fund design.”

Piet Duffhues, professor emeritus of finance, Tilburg University

“Fiduciary Management gives the interested reader a concise perspective on fiduciary investment management, and adds to this a well structured perspective on institutional portfolio management. Anton van Nunen has been a successful pioneer from the early days of fiduciary management, and his insight and experience will prove a helpful guide for many who are venturing into this area.”

Roderick Munsters, chief investment officer, ABP Pension Fund, The Netherlands

“This book explains in a lucid fashion how fiduciary management allows those who are responsible for advancing the interests of the beneficiaries of a pension fund to harness the specialized expertise of investment managers. This timely book is about the continuous quest for institutional innovations that ensure that the ultimate stakeholders of pension funds benefit from the increasing potential of financial markets. In this way, it helps to raise the value created by one of the most ingenious inventions in the history of mankind: pension funds offering credible promises about old-age income.”

Arij Lans Bovenberg, economics professor, Tilburg University, and scientific director, Network for Studies on Pensions, Aging, and Retirement, Tilburg University

“This book is more than a blueprint. It is a very complete document, both for the seasoned professional as for the talented rookie. Every “prudent man” or “woman” should read it. It contains very interesting international historic overviews. The book indicates how broad and comprehensive a good pension system should be. Next to the conceptual context, this book delivers many practical suggestions and tips, especially for asset liability modeling and portfolio construction.”

Jaap Maassen, member of the Executive Board and Pensions, director at ABP Pension Fund, The Netherlands, and chairman of the European Federation for Retirement Provision

“Anton van Nunen has written a book that is essential reading for anyone involved in investment management. Fiduciary investment management is a hot topic nowadays and Anton provides a solid description and analysis of all relevant parts of the fiduciary management process. Moreover, it reads like a novel. Indeed a successful attempt to bridge the gap between theory and practice.”

Jan Overmeer, retired member of the Board of AEGON Nederland N.V. and external advisor to several industry and corporate pension funds

“Anton van Nunen is a pioneer of the concept of Fiduciary Management per excellence. The contribution of 21 providers makes clear that fiduciary management is not a tight straitjacket, but that it can flexibly be adapted to what trustees wish to outsource and can outsource. An important book for the many trustees struggling with the trade-off of what should be managed in-house, and what can responsibly be outsourced to a fiduciary manager.”

Guus Boender, cofounder and chairman of ORTEC Finance, Professor of Asset Liability management, Free University Amsterdam

“Fiduciary management has drawn a lot of attention from industry-wide pension schemes recently. This is strongly connected with the increased responsibility and complexity of the investment process at pension funds. But also the investment results of the early years of this century have made funds contemplate their position. There are many forms of fiduciary management. This book offers readers a good insight in fiduciary management. Pension boards and their advisors can benefit from the description of its aspects, as with this knowledge, one can come to a better assessment of the pros and cons of the different types of investment management.

One thing is clear: industry-wide pension funds can outsource investment management, be it or not in the form of far-reaching fiduciary management. However, they cannot delegate or outsource the responsibility for the well-being of the pension fund, including its investment policy. To meet exactly this responsibility, it is necessary to make informed decisions. With this book, Anton van Nunen contributes to this required knowledge. A fine initiative!”

Peter J.C. Borgdorff, director of the Association of Industry-wide Pension Funds, The Netherlands

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Library of Congress Cataloging-in-Publication Data:

Nunen, Anton van, 1950-

Fiduciary management : blueprint for pension fund excellence / Anton van Nunen.

p. cm. — (Wiley finance series)

Includes bibliography references and index.

ISBN 978-0-470-17103-5 (cloth)

1. Pension trusts ∇ Management. I. Title

HD7105.4.N86 2008

331.25’2068 – dc22

2007023238

Foreword

I first met Dr Anton van Nunen at a conference organized by my company, Russell Investment Group, in the Netherlands in May 2006. Having ascertained that our views were broadly similar on pension fund governance (my topic at the conference), Dr van Nunen introduced himself to me. And now that I’ve read his book, I’ve ascertained that our views are broadly similar on a wide variety of topics. Hence this foreword.

I can start in two ways, either of which leads quickly to my main point.

One is to assert that good governance is worth money. I’ve never seen definitive proof of that statement, either for pension funds or for corporate boards, but it hardly needs proof. Think of any hypothetical organization. Superimpose on it either good governance (characterized by clear delegation and decision rights) or poor governance (characterized by overlapping responsibilities and confusion as to who is responsible for what). Which do you think is more likely to be successful? It’s as obvious as that.

The other is to recall the statement that good people can make any organizational structure work. That may well be true, but why create a structure that’s an obstacle they have to jump over? Why not give them a structure that is helpful in itself? Wouldn’t that increase the chances of success in their venture?

My point is that governance, by which I mean the way in which decision rights are assigned, is a worthwhile issue to treat seriously, and an essential ingredient if success is to be achieved by plan rather than by chance. And “fiduciary management” is an essential feature in the governance of defined benefit pensions.

Since terminology differs from country to country, and this book is clearly designed to have international appeal, let’s clarify what “fiduciary management” means. Think first of a corporation. Consider three broad layers. It has a board that sets or approves direction. It has workers who create the product or service. And it has management that hires workers and organizes them to facilitate production. So too with a pension plan. It has (or ought conceptually to have) three layers. There’s a board of trustees (or its equivalent with a name that varies from country to country) with ultimate fiduciary responsibility. There are investment managers who produce investment judgments (the pension fund’s investment product). And there is the “fiduciary manager,” playing the equivalent of the corporate role of “management.”

Most pension funds are too small to have a full-time fiduciary manager in-house. Their best bet is to hire a company that specializes in this role. It’s likely to work better than having a part-time board over-reach itself and play the role of full-time fiduciary manager, or have someone in-house, with other corporate responsibilities, play the role part-time. Outsourced fiduciary management is the model that is used in this book.

Dr van Nunen goes much further than to discuss governance. He discusses all aspects of what should be done in making a defined benefit plan successful, and expresses his opinions forthrightly. We may not agree on every point (do any two advisers ever?), but he backs his opinions solidly and clearly, and following them should increase a fund’s chances of success.

His analysis is up-to-date: for example, he deals with hedge funds, liability-driven investing, and transitions of portfolios from one manager to another. And he not only traces the history of pension arrangements, but supplements it with a fascinating chapter comparing arrangements around what I think of as the funded world. His primary focus is on the Netherlands, where in my view defined benefits are more prominent, and administered more sensibly, than anywhere else in the world. But his ideas are relevant to fiduciaries around the funded world. I’m very glad that he asked me to write this foreword and I hope you find his book as interesting, engaging and useful as I did.

Don Ezra

Director, Investment Strategy, Russell Investment Group

Coauthor, Pension Fund Excellence

New York, June 2007

Preface

A good advisor not only provides a sounding board for one’s own ideas, he or she contributes their own valuable ideas as well. This is always the case with Dr. Kees Cools, Professor of Finance at Groningen University and a partner at Boston Consulting Group, who is what we call in Holland a commissaris, or advisor, to my company. I have the pleasure of sitting down with him periodically to hold rather high-level discussions about what our company is doing. Some years ago, after I had completed several Fiduciary Management mandates on behalf of various pension funds, he suggested that I write a book about these experiences. The result of that advice is now in front of you.

One of the main reasons for writing this book was the success that has been achieved as a result of the first fiduciary contract between an institutional investor and a major financial services firm. This contract received a certain amount of publicity in the financial press, and after a gestation period, it led several parties to copy various parts of it. As various arrangements have been negotiated, however, this has gradually blurred the picture of Fiduciary Management. This book tries to restore some clarity to the concept. It indicates where and how—and why—Fiduciary Management can be employed, and it spells out the attributes and merits of this approach to organizing the management of an institutional investment portfolio.

I am indebted to Boudewijn Dessing and Hans Kestens of the board of VGZ-IZA, a major Dutch health insurance company, and to its financial officer, Guus Sommerdijk, for giving me the opportunity to work through the idea of structuring an investment process in which an institutional investor that does not have in-house investment expertise can nonetheless be in control of its pension fund, which is an increasingly vital part of the activities at many companies. I am grateful to them for enabling me to put these ideas in practice.

As I gradually worked out the necessary tasks and controls inside, and especially outside, at VGZ-IZA and other organizations, the concept of what would become Fiduciary Management began to take shape. I am grateful to the officers mentioned previously for enabling me to put these ideas in practice and for having the courage to give this assignment to a one-man shop. Their company became the first institutional investor to hire a Fiduciary Manager.

The content of this book has been enlarged and greatly improved by in-depth discussions with peers such as Dr. Con Keating of the Finance Development Centre Limited in the UK (“You should write a book, not a pamphlet”), Koen De Ryck of Pragma Consulting in Belgium, Professor Amin Rajan of Create Research, and by the writings of Don Ezra of the Russell Investment Group. I appreciate their comments and stimulating discussions. After reading one of my articles on the subject, valuable comments were offered by my dear friend, Professor Jean Frijns, Professor of Investment Theory at the University of Amsterdam. Jean, formerly chief investment officer of ABP, one of the largest pension funds in the world, helped me validate the ideas of Fiduciary Management.

Another long time friend and colleague, Haitse Hoos, read most of the manuscript, and his additions and critical questions have substantially improved the content. Martijn Vos and Ridzert van der Zee, distinguished researchers at Ortec, a leading Dutch operations research company specializing in financial planning and asset-liability management improved the chapter on asset-liability modeling. Numerous colleagues in the field—indeed too many to mention here—took great interest in the book and convinced me it was worth carrying on in times when the work did not move ahead as smoothly as I expected.

Last but not least, my wife Francine and daughter Lot were not only kind enough to set me free of all duties on the weekends, they consistently supported me when I was less content with the pace of the writing and with the quality of the content.

I hope that the support of all those people has resulted in a book that can shed some light on issues that I think are highly relevant to pension funds and insurance companies now and will remain critical in the future: What organizational structures and actions should be undertaken by pension funds if they are to successfully carry out their important mission of providing retirement incomes? What is the most effective way to organize and carry out their duties?

Despite all the help received, I am afraid there will inevitably be errors and omissions. They are mine, and that brings to mind a comment from John Thain, the chairman of the New York Stock Exchange and the NYSE Euronext Group but formerly the head of Goldman Sachs. During the celebration of the first fiduciary mandate won by his company, he told me, “Anton, if something is wrong, you call me.”

Anton van Nunen

The Netherlands

Summer 2007

CHAPTER 1

The Pendulum Swings Back in Asset Management

Fiduciary Management is a way of organizing the management of sizable investment portfolios. The growing interest in this phenomenon reflects the beginnings of an historic shift in the approach many institutions are taking to investment management. After several decades of expanding the range of actors involved in managing an institutional portfolio, there is increasing recognition of the problems created by the involvement of this large cast of characters. When many are involved, it turns out, no one is fully responsible.

Fiduciary Management can be viewed in Hegelian terms: thesis, antithesis, synthesis. In the context of investment management, the thesis was the balanced manager: As institutional investment was growing more than a century ago, the initial response was to turn money over to a single manager who would select all investments, manage the portfolio, and take full responsibility for all investment issues and decisions. Antithesis came about half a century later in the form of Modern Portfolio Theory. It encouraged the view that specialized managers could achieve better results than generalists, and this led institutions to put together armadas of managers under the guidance of investment consultants. But this has created problems in achieving comprehensive risk management, strategic decision making, and effective organizational governance.

The Fiduciary Manager is the synthesis: This Fiduciary Manager oversees a decentralized, outsourced array of investment managers, but the Fiduciary Manager also centralizes responsibility in one person or organization.