Traditional investment consultants shepherd UK pension funds along in a flock, moving slowly and ponderously.

In the last year, however, a small entrant has been stirring things up, nipping at the heels of pension funds and suggesting a new way of doing things.

Cardano is already established in the Netherlands, where its primary offering has been derivative overlays for sophisticated pension funds looking to hedge a variety of different risks.

In the UK, it is offering “solvency management”, managing a fund’s assets to narrow the gap between assets and liabilities with as little risk as possible, and it has generated a surprising amount of interest.

“There is a desire for something that’s new, not just the usual,” says Kerrin Rosenberg, Cardano UK’s chief executive.

This hunger for innovation has led to Cardano being invited to pitch for business by a large number of potential clients, turning into about £5.5bn (€7bn, $11bn) in assets under advice or management with three clients: GKN, AstraZeneca and Southern Electric.

One might expect competitors to be put out by this, but on the contrary, “our name has even been put forward by other consultants”, says Mr Rosenberg.

This odd friendliness can be explained in the context of a market where the old stability may no longer be sustainable and incumbents are tinkering with their business models.

Mercer already offers “implemented consulting”, while P-Solve specialises
in derivatives overlay and multi-asset advice.

Nevertheless, Mr Rosenberg believes his company has a competitive advantage over these other innovators. Because Cardano is regulated as an asset manager and is keen for its clients to delegate investment decisions and implementation entirely, it is able to move quickly when it sees an investment opportunity, he explains.

“The two things that have found immediate traction are our more opportunistic, real-time approach and the performance fees.”

Cardano says because it adds value by narrowing the gap between liabilities and assets, using derivative overlays to generate return and control risk, its fee structure is based on meeting a performance objective defined according to the fund’s level of solvency.

This is not as straightforward as traditional performance fees, cautions Mr Rosenberg.

First of all, “you need to agree what you mean by solvency”, he says, and then “the biggest challenge is how you reflect the risk”. The fee structure is negotiated separately with each client, defining what is meant by risk and how it will be measured for calculating the performance on which the fee is based.

“There will be some challenges and opportunities for performance measurement providers in this area in the next few years,” comments Mr Rosenberg, who looks remarkably pleased with himself, or rather with the business.

“We’re ahead of the business plan in every area,” he says. The tasks he set himself on July 1 last summer, when the UK branch of the Dutch company was set up, were: “creating the infrastructure, hiring people and winning clients, not necessarily in that order”, and all of these are on course.

Senior hires have included Keith Guthrie, formerly a fund of hedge funds manager at GAM, as head of investment and David West of Brown Shipley as head of operations.

Having signed up three clients in its first nine months of existence, Cardano is even contemplating the likelihood that it will have to turn away business this year. “We might have to take a pause this year. We’ve always intended to have a smaller number of high quality relationships,” says Mr Rosenberg.

What Mr Rosenberg would ideally like to do for his clients is to manage their assets in relation to their liabilities, using derivatives
to improve the funding
position of pension funds without extreme volatility, and selecting external
fund managers for the underlying components of the portfolio.

For this all-round offering, Cardano UK can call on other parts of the business, namely a 30-strong derivatives operation in Rotterdam, which has been in existence since 2000, and a Swiss-based manager selection company called Altis Investment Management.

One of Cardano UK’s three clients has delegated most of the investment process to the consultancy, but with the other two “we’re not driving the car”, he admits. He is sanguine about this cautious approach on the part of the pension funds, recognising a need to be pragmatic in supporting pension fund trustees in changing their relationship with consultants.

“Even in these advisory relationships, we try to be innovative,” Mr Rosenberg says.

One option Cardano offers is to advise on an entire pension fund, while implementing its advice on a portion of the assets.

“This provides a very transparent comparison to show how we can add value by implementation.”

It should become clear very quickly whether Cardano can earn the performance-based fees it charges.

Copyright The Financial Times Limited 2018. All rights reserved.

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