Rapid response service for changing times

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Do a Google search on Andy Tunningley, and there are more results relating to his semi-professional rugby career than his years in investment consultancy, despite his high profile role at Hewitt Associates, the UK consultant, as head of investment.

But, much though he enjoys reminiscing about his days with Saracens rugby club, he would rather discuss how he is helping pension fund trustees tackle their investment issues.

He points in particular to the asset allocation service the consultant decided to set up four years ago to help clients make decisions about timing their investments.

“We built the team because no one was doing this [providing timing advice on asset allocation moves],” says Mr Tunningley.

There are still few competitors, he adds, despite the growth in so-called fiduciary management and implemented consulting.

These are variations on the theme of the outsourced chief investment officer or investment committee, where pension fund trustees delegate some or all investment decision-making to a third party.

Mr Tunningley says the proliferation of these services is another example of the “alphabet soup” syndrome that dogs financial services, with a lack of clarity over what the different labels for the services mean.

Implemented consulting often means choosing, monitoring and changing fund managers, he says. Hewitt, on the other hand, wants to do more for clients.

“We see the risk profiling work, the asset allocation and the fund manager decisions as linked,” says Mr Tunningley. It will take this work on for pension fund trustees via its delegated consulting service.

Perhaps the biggest selling point for this type of service in times like this is the rapid response it can provide to changing market conditions. In conversation last week, Mr Tunningley revealed Hewitt had made the decision to go back into equity markets.

“We started buying again yesterday morning,” he said last Wednesday. “We are still very much underweight in quoted markets, but there has been such a movement down, we took the opportunity for clients who can [make the move] to start coming back into global equities.”

This was not a big move, he emphasised. “If clients had a strategic range [for equity exposure] we had been encouraging people to be at the bottom of the range. Now we are saying ‘increase’, but not back to a neutral position.”

There are not many competitors doing this type of tactical asset allocation, says Mr Tunningley.

“In the past, consultants said they were not in the game of doing tactical asset allocation,” he says.

The standard approach was (and largely still is), to establish a strategic asset allocation that was revisited every three years. No changes were made between reviews.

Hewitt’s asset allocation service takes a one to three year view. It has been out of real estate for two years, says Mr Tunningley, and took a view last summer that credit had become too expensive, advising a reduction in credit exposure and a moratorium on buying corporate bonds. “In the past few months, we have said to start putting a credit position back on,” he says.

“We have added 1 per cent per annum [to returns] from asset allocation decisions since the team was set up,” he adds.

The ideas coming out of the team are not restricted to clients paying for the delegated consulting service, as is the case elsewhere. “To take advantage of good ideas, there are access and speed of movement problems, so some restrict their ideas depending on the service. Hewitt doesn’t,” says Mr Tunningley.

The consultant charges a base fee plus a performance fee for its delegated service, but Mr Tunningley rejects the idea that the consultant’s performance should be externally monitored or assessed.

Performance is measured by looking at whether Hewitt meets the objectives set down in the outsourcing agreement, he says. The key to success, he says, is scale and resource.

Hewitt has had to re-tool significantly over the past five years to keep up with the changing environment, he says. “We couldn’t have provided the range of services we do now five years ago. I am surprised how some of the small consultants are keeping up.”

In the US, he says, nine of the top 10 consultants provide discretionary services. “So those with scale and capability are being asked to provide that service.” However, most clients in the US “still buy a more advisory approach”.

In the Netherlands, where fiduciary management is often depicted as widespread, Mr Tunningley says there has been modest growth over the past year, with around 15 per cent of assets under fiduciary management.

He expects growth in the UK, because it is behind in this area.

“But a lot of schemes will still want to keep control in-house.” Fiduciary management will not meet every scheme’s requirements.

Many UK defined benefit pension schemes are looking to move to buy-out, he adds, where they offload their assets and liabilities to an insurer; or to buy-in, where they buy a bulk annuity to remove liabilities associated with pensioners.

“So part of what we are doing is helping schemes get to a position where they can do a buy-in or buy-out.”

See the interview at: www.ft.com/ftfmvideo

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