Susan M. Mangiero's Instablog Dr. Susan Mangiero is President and CEO of Investment Governance, Inc. (http://www.investmentovernance.com) with over twenty years of experience in capital markets, global treasury, asset-liability management, portfolio management, financial risk control and valuation. She has worked on three trading desks, in the areas of foreign exchange, fixed income, futures and options. An Accredited Valuation Analyst, Accredited Investment Fiduciary Analyst, Chartered Financial Analyst and certified Financial Risk Manager, Dr. Mangiero is regularly invited to speak about valuation, risk and governance with an emphasis on applications to pensions and hedge funds. She has addressed groups that include the U.S. Department of Labor, Chicago Board of Trade, New York State Department of Insurance, Merrill Lynch, Association of Public Pension Fund Auditors, Association of Forensic Economics, New England Public Employee Retirement Systems Forum, Global Association of Risk Professionals, American Society of Appraisers, the Wall Street Transcript, Strategy Institute, Connecticut State Department of Banking, Canadian Investment Review (keynote), Strategic Research Institute, Incisive Media (publisher of Hedge Funds Review) and the Connecticut Society of Certified Public Accountants. Her book, Risk Management for Pensions, Endowments, and Foundations (John Wiley & Sons, 2005), looks at risk management and valuation issues, with an emphasis on fiduciary responsibility and best practices. Her articles have appeared in Hedge Fund Review, Investment Lawyer, Valuation Strategies, RISK Magazine, Financial Services Review, Family Foundation Advisor, Hedgeco.net (http://hedgeco.net/), Expert Evidence Report, and Bankers Magazine. Susan Mangiero has written chapters for several books including the Litigation Services Handbook and The Handbook of Interest Rate Risk Management and is a contributing editor of the Journal of Compensation and Benefits. She has been quoted in places that include the New York Times, Wall Street Journal, Baltimore Sun, Bloomberg.com (http://bloomberg.com/), 401(k) Wire and Pensions & Benefits. She holds a Ph.D. in finance from the University of Connecticut, an MBA in Finance from New York University, an MA in Economics from George Washington University and a BA in Economics from George Mason University. Susan M. Mangiero http://seekingalpha.com Investment Ethics: How to Make Money and Win Clients http://seekingalpha.com/instablog/178595-susan-m-mangiero/38004-investment-ethics-how-to-make-money-and-win-clients?source=feed 38004 The following text is from an article I recently wrote for Mann on the Street (December 2009). As always, I welcome comments from readers. I am an avid believer in the notion that doing good means doing well. Click for the pdf version of "Investment Ethics: How to Make Money and Win Clients" by Dr. Susan Mangiero, CFA, FRM.

According to Plato, “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws.” Given the current spate of financial scandals, the words of this ancient philosopher hit close to home. Rule-makers around the world are adding staff, beefing up mandates and otherwise looking to stabilize markets after an unprecedented rollercoaster ride for individual and institutional investors alike. Wall Street is girding itself for a tough regulatory climate, especially in areas such as compensation and proprietary risk-taking. The unfortunate fallout, as with any statute, is the blurring of lines between good and bad players. Companies lose the flexibility to reward prudent process and are challenged to lure new clients on the basis of transparency. After all, if everyone is forced to abide, how do buy side executives separate the wheat from the chafe?

The good news for ethicists is that integrity matters. As stated in its 2009 Midyear Special Report about trust, Edelman Public Relations reports that “profitability and performance falls behind employee well-being, transparent and honest business practices.” In “Building Customer Value and Profitability With Business Ethics, researchers Robert C. McMurrian and Erika Matulich support the notion that good behavior adds “value for customers” and results in “increased profitability and performance for the firm.” Contrast that with the results of a February 2009 Marist poll sponsored by the Knights of Columbus which assigns a “grade of D or F in ethical matters to the financial and investment industry.”

While grossly unfair to indict an entire collection of professionals, it is surprising that Wall Street executives have been relatively silent on the topic of moral leadership. Statistics document the almost $3 trillion allocated to “socially responsible” money managers yet there is almost nothing known about what the sell side spends on investment governance.

The truth is straightforward. Bad apples spoil the pie for everyone. It is folly to ignore the negative externalities due to misdeeds of industry peers. The costs are too high. Lost clients, fiduciary litigation, new law compliance and missed opportunities are only a few components of the rogue’s price tag, handed off to increasingly impatient shareholders, investors and taxpayers. Even if one is inclined to skimp for whatever reason, it is not smart business. With new fiduciary regulations looming over the horizon, service providers who take the time to learn more about institutional investor pain points could have a big advantage in terms of client acquisition and retention.

Institutional investors do not get a free pass. They absolutely must dig deep or risk being sued themselves, see their name in headlines, lose their job  and/or incur the wrath of unhappy beneficiaries.

The encouraging news is that there are lots of ways to improve due diligence. Far from exhaustive, the following list includes some suggested action steps:

  • Ask to meet with the individual who is responsible for creating a standard of investment best practices for the back office, senior traders and sales team members, respectively
  • Inquire whether bonuses are tied to risk-adjusted performance that considers both qualitative and quantitative measures
  • Identify whether a service provider has been sued and whether they were found culpable
  • Query whether the compliance officer, if one exists, is tasked to develop investment best practices that go beyond the technical adherence to a particular statute
  • Request examples as to how a service provider expended resources in implementing best practice standards even when not required to do so by law
  • Ask if best practices are applied equally across business units in different countries, if applicable
  • Discuss how the service provider controls for conflicts of interest
  • Require information about the service provider's fiduciary liability insurance policy (cost, scope, whether terms have ever been rescinded, etc)
  • Gain a better understanding of the mechanism by which a vendor acquires new clients.

Unless Lady Luck is a close friend, scant attention paid to investment ethics is an invitation to trouble. Who wants to find themselves in a courtroom, explaining bad acts or incomplete oversight?

On a positive note, conversations with buy side executives about conflicts of interest, compensation and risk management offer an opportunity to spin transparency into gold. It is better that industry participants climb the same train than be forced to bear the brunt of a “one size fits all” solution from legislators with little or no experience in capital markets. Ideally, a sufficiently large number of leaders coalesce to enforce higher standards on behalf of the millions of pension, endowment, foundation and mutual fund beneficiaries. They count on stewards and investment service providers alike  to be there in more ways than one.

Author Mark Twain's lament that "physical courage should be so common in the world, and moral courage so rare" is hollow if rational self interest combines with even a wee bit of idealism.



Disclosure: No positions]]> Tue, 01 Dec 2009 22:54:30 -0500 The following text is from an article I recently wrote for Mann on the Street (December 2009). As always, I welcome comments from readers. I am an avid believer in the notion that doing good means doing well. Click for the pdf version of "Investment Ethics: How to Make Money and Win Clients" by Dr. Susan Mangiero, CFA, FRM.

According to Plato, “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws.” Given the current spate of financial scandals, the words of this ancient philosopher hit close to home. Rule-makers around the world are adding staff, beefing up mandates and otherwise looking to stabilize markets after an unprecedented rollercoaster ride for individual and institutional investors alike. Wall Street is girding itself for a tough regulatory climate, especially in areas such as compensation and proprietary risk-taking. The unfortunate fallout, as with any statute, is the blurring of lines between good and bad players. Companies lose the flexibility to reward prudent process and are challenged to lure new clients on the basis of transparency. After all, if everyone is forced to abide, how do buy side executives separate the wheat from the chafe?

The good news for ethicists is that integrity matters. As stated in its 2009 Midyear Special Report about trust, Edelman Public Relations reports that “profitability and performance falls behind employee well-being, transparent and honest business practices.” In “Building Customer Value and Profitability With Business Ethics, researchers Robert C. McMurrian and Erika Matulich support the notion that good behavior adds “value for customers” and results in “increased profitability and performance for the firm.” Contrast that with the results of a February 2009 Marist poll sponsored by the Knights of Columbus which assigns a “grade of D or F in ethical matters to the financial and investment industry.”

While grossly unfair to indict an entire collection of professionals, it is surprising that Wall Street executives have been relatively silent on the topic of moral leadership. Statistics document the almost $3 trillion allocated to “socially responsible” money managers yet there is almost nothing known about what the sell side spends on investment governance.

The truth is straightforward. Bad apples spoil the pie for everyone. It is folly to ignore the negative externalities due to misdeeds of industry peers. The costs are too high. Lost clients, fiduciary litigation, new law compliance and missed opportunities are only a few components of the rogue’s price tag, handed off to increasingly impatient shareholders, investors and taxpayers. Even if one is inclined to skimp for whatever reason, it is not smart business. With new fiduciary regulations looming over the horizon, service providers who take the time to learn more about institutional investor pain points could have a big advantage in terms of client acquisition and retention.

Institutional investors do not get a free pass. They absolutely must dig deep or risk being sued themselves, see their name in headlines, lose their job  and/or incur the wrath of unhappy beneficiaries.

The encouraging news is that there are lots of ways to improve due diligence. Far from exhaustive, the following list includes some suggested action steps:

  • Ask to meet with the individual who is responsible for creating a standard of investment best practices for the back office, senior traders and sales team members, respectively
  • Inquire whether bonuses are tied to risk-adjusted performance that considers both qualitative and quantitative measures
  • Identify whether a service provider has been sued and whether they were found culpable
  • Query whether the compliance officer, if one exists, is tasked to develop investment best practices that go beyond the technical adherence to a particular statute
  • Request examples as to how a service provider expended resources in implementing best practice standards even when not required to do so by law
  • Ask if best practices are applied equally across business units in different countries, if applicable
  • Discuss how the service provider controls for conflicts of interest
  • Require information about the service provider's fiduciary liability insurance policy (cost, scope, whether terms have ever been rescinded, etc)
  • Gain a better understanding of the mechanism by which a vendor acquires new clients.

Unless Lady Luck is a close friend, scant attention paid to investment ethics is an invitation to trouble. Who wants to find themselves in a courtroom, explaining bad acts or incomplete oversight?

On a positive note, conversations with buy side executives about conflicts of interest, compensation and risk management offer an opportunity to spin transparency into gold. It is better that industry participants climb the same train than be forced to bear the brunt of a “one size fits all” solution from legislators with little or no experience in capital markets. Ideally, a sufficiently large number of leaders coalesce to enforce higher standards on behalf of the millions of pension, endowment, foundation and mutual fund beneficiaries. They count on stewards and investment service providers alike  to be there in more ways than one.

Author Mark Twain's lament that "physical courage should be so common in the world, and moral courage so rare" is hollow if rational self interest combines with even a wee bit of idealism.



Disclosure: No positions]]> More Focus on Pension Risk Management or Not Enough? http://seekingalpha.com/instablog/178595-susan-m-mangiero/36867-more-focus-on-pension-risk-management-or-not-enough?source=feed 36867 According to an October 2009 study entitled "Reactions to an EDHEC Study on the Impact of Regulatory Constraints on the ALM of Pension Funds" by researcher Samuel Sender, regulations discourage European retirement plan managers from focusing on long-term risk management objectives. The study further suggests that risk management is far superior to risk measurement if a focus on funding ratios steals resources better spent on ensuring the long-term viability of the plan. The 142 respondents cite a fear of tighter accounting rules and concern that regulators need to "provide incentives" to build internal models. Nearly eighty percent of survey-takers "report that dynamic strategies are difficult to implement because management agreement is needed to rebalance a portfolio." Click here to access the study.

In contrast, a new poll conducted by SEI suggests that pension risk management is a top priority for executives in Canada, Netherlands, UK and the United States. According to the November 18, 2009 press release released by SEI, "the percentage of pensions employing a Liability Driven Investing strategy has nearly triped over the past three years from 20 percents in 2007 to 54 percent in 2009. Queries about pension benchmarks sugges that decision-makers are veering away from absolute return in favor of "improved funded status." Click to read "SEI Global Poll: 3rd Annual Liability Driven Investing Poll Finds A Significant Increase in Adoption" (November 18, 2009).

A 2008 survey created by Pension Governance, Incorporated (now rebranded as Investment Governance, Inc.) supports the notion that more work remains to be done, by far. Click to read "Pension Risk Management: Derivatives, Fiduciary Duty and Process."

Each survey-taker was asked to self-identify as a USER if he/she works for a plan that trades derivatives in its own name. A NON-USER works for a plan that does not trade derivatives directly but may nevertheless be exposed indirectly if any of the plan's asset managers trade derivatives.

  • Plan size seems to be one factor that distinguishes USERS from NON-USERS, with 39% of USERS managing plans in excess of $5 billion versus 14% of NON-USERS associated with plans larger than $5 billion.
  • Pension decision-making appears to vary considerably by job function, with 48% (37%) of USERS (NON-USERS) choosing "Other" rather than selecting from given titles such as Actuary, Benefits Committee Member, CFO or Human Resources Officer.
  • Time allocation varies considerably with 64% (40%) of USERS (NON-USERS) saying they devote 75 to 100 percent of their work week on pension issues. In contrast, 37% of NON-USERS say they spend 0 to 24% of their work week on pension issues.
  • A majority of USERS (64%) and NON-USERS (48%) have had discussions about the concept of a fiduciary duty to hedge asset-related risks. A smaller number say they have discussed the concept of a fiduciary duty to hedge liability-related risks.
  • Few plans currently embrace an enterprise risk management approach with 59% (57%) of USERS (NON-USERS) responding that their organization does not use a risk budget. When asked if their organization has or is planning to hire a Chief Risk Officer, 57% (64%) of USERS (NON-USERS) answered "No."
  • NON-USERS cite numerous reasons for not using derivatives directly, including, but not limited to, "Lack of Fiduciary Understanding" (25%), "Perception of Excess Risk" (31%), "Considered Too Complex" (23%), "Prohibition Against Possible Leverage" (19%) and/or "Defined Benefit Plan Risk Not Considered Significant" (28%).
  • A query about whether survey-takers review external money managers' risk management policies results in 70% (58%) of USERS (NON-USERS) responding "Yes." Fifty-two percent (57%) of USERS (NON-USERS) say they review external money managers' valuation policies. This survey did not drill down with respect to the rigor of questions being asked.
  • Survey respondents seem to rely mainly on elementary tools to measure risk. Eighty-three percent (64%) of USERS (NON-USERS) rank Standard Deviation first in importance. Seventy-nine percent (63%) of USERS (NON-USERS) rank Correlation second. Only one-third (38%) of NON-USERS cite Stress Testing (Simulation). Four out of 10 USERS cite Value at Risk in contrast to 23% of NON-USERS who do the same.
  • Survey respondents worry about the future with 58% (60%) of USERS (NON-USERS) ranking "Accounting Impact" as a concern. Other concerns were also noted to include "Regulation," "Longevity of Plan Participants" and "Fiduciary Pressure."

]]> Sun, 22 Nov 2009 23:48:29 -0500 According to an October 2009 study entitled "Reactions to an EDHEC Study on the Impact of Regulatory Constraints on the ALM of Pension Funds" by researcher Samuel Sender, regulations discourage European retirement plan managers from focusing on long-term risk management objectives. The study further suggests that risk management is far superior to risk measurement if a focus on funding ratios steals resources better spent on ensuring the long-term viability of the plan. The 142 respondents cite a fear of tighter accounting rules and concern that regulators need to "provide incentives" to build internal models. Nearly eighty percent of survey-takers "report that dynamic strategies are difficult to implement because management agreement is needed to rebalance a portfolio." Click here to access the study.

In contrast, a new poll conducted by SEI suggests that pension risk management is a top priority for executives in Canada, Netherlands, UK and the United States. According to the November 18, 2009 press release released by SEI, "the percentage of pensions employing a Liability Driven Investing strategy has nearly triped over the past three years from 20 percents in 2007 to 54 percent in 2009. Queries about pension benchmarks sugges that decision-makers are veering away from absolute return in favor of "improved funded status." Click to read "SEI Global Poll: 3rd Annual Liability Driven Investing Poll Finds A Significant Increase in Adoption" (November 18, 2009).

A 2008 survey created by Pension Governance, Incorporated (now rebranded as Investment Governance, Inc.) supports the notion that more work remains to be done, by far. Click to read "Pension Risk Management: Derivatives, Fiduciary Duty and Process."

Each survey-taker was asked to self-identify as a USER if he/she works for a plan that trades derivatives in its own name. A NON-USER works for a plan that does not trade derivatives directly but may nevertheless be exposed indirectly if any of the plan's asset managers trade derivatives.

  • Plan size seems to be one factor that distinguishes USERS from NON-USERS, with 39% of USERS managing plans in excess of $5 billion versus 14% of NON-USERS associated with plans larger than $5 billion.
  • Pension decision-making appears to vary considerably by job function, with 48% (37%) of USERS (NON-USERS) choosing "Other" rather than selecting from given titles such as Actuary, Benefits Committee Member, CFO or Human Resources Officer.
  • Time allocation varies considerably with 64% (40%) of USERS (NON-USERS) saying they devote 75 to 100 percent of their work week on pension issues. In contrast, 37% of NON-USERS say they spend 0 to 24% of their work week on pension issues.
  • A majority of USERS (64%) and NON-USERS (48%) have had discussions about the concept of a fiduciary duty to hedge asset-related risks. A smaller number say they have discussed the concept of a fiduciary duty to hedge liability-related risks.
  • Few plans currently embrace an enterprise risk management approach with 59% (57%) of USERS (NON-USERS) responding that their organization does not use a risk budget. When asked if their organization has or is planning to hire a Chief Risk Officer, 57% (64%) of USERS (NON-USERS) answered "No."
  • NON-USERS cite numerous reasons for not using derivatives directly, including, but not limited to, "Lack of Fiduciary Understanding" (25%), "Perception of Excess Risk" (31%), "Considered Too Complex" (23%), "Prohibition Against Possible Leverage" (19%) and/or "Defined Benefit Plan Risk Not Considered Significant" (28%).
  • A query about whether survey-takers review external money managers' risk management policies results in 70% (58%) of USERS (NON-USERS) responding "Yes." Fifty-two percent (57%) of USERS (NON-USERS) say they review external money managers' valuation policies. This survey did not drill down with respect to the rigor of questions being asked.
  • Survey respondents seem to rely mainly on elementary tools to measure risk. Eighty-three percent (64%) of USERS (NON-USERS) rank Standard Deviation first in importance. Seventy-nine percent (63%) of USERS (NON-USERS) rank Correlation second. Only one-third (38%) of NON-USERS cite Stress Testing (Simulation). Four out of 10 USERS cite Value at Risk in contrast to 23% of NON-USERS who do the same.
  • Survey respondents worry about the future with 58% (60%) of USERS (NON-USERS) ranking "Accounting Impact" as a concern. Other concerns were also noted to include "Regulation," "Longevity of Plan Participants" and "Fiduciary Pressure."

]]> Do Institutional Investors Have More Clout Now? http://seekingalpha.com/instablog/178595-susan-m-mangiero/27321-do-institutional-investors-have-more-clout-now?source=feed 27321 Take Company A for example. Since certain of their models are forced into obsolescence by top management (though still functional), they no longer sell spare parts so one has no choice but to toss otherwise viable products in the trashbin. It seems wasteful to this budget-focused gal but the vendor leaves me little room to maneuver. 

Then there is Company B. A purveyor of premium communication accessories, their service representative took down copious details about shipping location and what products we wanted to order. However, to pay for the merchandise, we were directed to a separate billing clerk who had us repeat all the gory details because the two departments had systems that did not talk to one another.

Company C has limited customer service hours and no "Contact Us" email address posted on their website. Hence, we were forced to take precious time during the next work day to call the vendor after we missed reaching them during a limited client care window. It would have been so much nicer to be able to call during extended hours or send a quick email.

The list goes on. I'm sure readers have their own tales to tell.

Anyhow, this repeated angst got me to thinking about client service in buyside land, fiduciary asymmetries and balance of power when it comes to large-scale purchasing. We've conducted enough market research studies to know that things are definitely changing in favor of institutional investors for a bunch of reasons.

Yet, and somewhat puzzling to some (though not to us), there still seems to be a disconnect between how certain products and services are sold to buy side executives. Some transactions that should make immediate sense are not necessarily causing the cash register to kaching for vendors.

Take risk management information technology or due diligence audits for example. Arguably a no-brainer to buy a product or service that helps one better identify, measure and manage risk, whether monies are being managed internally or not, some areas of IT and consulting spending have dipped according to recently published industry reports. While this may change (risk control is the new cool and budgets are being relaxed a bit), a reasonable person logically asks about barriers that currently inhibit sales. VERY importantly, part of the conundrum is the proper identification as to who makes for a logical buyer - Asset Manager? Consultant? Institutional Investor? All of the Above? None of the Above? Other?

When we've dug deep with organizations on both sides of the fence, we've heard variations of the following (with a gigantic caveat that there are some terrific companies in the vanguard when it comes to infrastructure that explicitly embraces their sensitivity to the fiduciary duties for which their institutional investor clients are responsible to discharge):

  • From a hypothetical service provider - "We aren't going to implement best practices X, Y and Z until the institutional investor requires us to do so. Otherwise, we're spending money we don't have to spend." 
  • From a hypothetical consulting firm - "We couldn't possibly engage in all of the best practices you recommend because of the costs to implement. We can't charge our clients enough to recoup our outlays."
  • From a hypothetical institutional investment executive - "We just assumed that our vendors are doing what they need to do in order to vet qualitative and quantitative risks appropriately.

No doubt lasting changes are underway with respect to industry participants, pricing structure and investment governance policies and procedures. With turmoil, there is tremendous opportunity to do well by doing good. We are excited about what the future holds in terms of investment best practices.

]]> Sun, 13 Sep 2009 23:08:32 -0400 Take Company A for example. Since certain of their models are forced into obsolescence by top management (though still functional), they no longer sell spare parts so one has no choice but to toss otherwise viable products in the trashbin. It seems wasteful to this budget-focused gal but the vendor leaves me little room to maneuver. 

Then there is Company B. A purveyor of premium communication accessories, their service representative took down copious details about shipping location and what products we wanted to order. However, to pay for the merchandise, we were directed to a separate billing clerk who had us repeat all the gory details because the two departments had systems that did not talk to one another.

Company C has limited customer service hours and no "Contact Us" email address posted on their website. Hence, we were forced to take precious time during the next work day to call the vendor after we missed reaching them during a limited client care window. It would have been so much nicer to be able to call during extended hours or send a quick email.

The list goes on. I'm sure readers have their own tales to tell.

Anyhow, this repeated angst got me to thinking about client service in buyside land, fiduciary asymmetries and balance of power when it comes to large-scale purchasing. We've conducted enough market research studies to know that things are definitely changing in favor of institutional investors for a bunch of reasons.

Yet, and somewhat puzzling to some (though not to us), there still seems to be a disconnect between how certain products and services are sold to buy side executives. Some transactions that should make immediate sense are not necessarily causing the cash register to kaching for vendors.

Take risk management information technology or due diligence audits for example. Arguably a no-brainer to buy a product or service that helps one better identify, measure and manage risk, whether monies are being managed internally or not, some areas of IT and consulting spending have dipped according to recently published industry reports. While this may change (risk control is the new cool and budgets are being relaxed a bit), a reasonable person logically asks about barriers that currently inhibit sales. VERY importantly, part of the conundrum is the proper identification as to who makes for a logical buyer - Asset Manager? Consultant? Institutional Investor? All of the Above? None of the Above? Other?

When we've dug deep with organizations on both sides of the fence, we've heard variations of the following (with a gigantic caveat that there are some terrific companies in the vanguard when it comes to infrastructure that explicitly embraces their sensitivity to the fiduciary duties for which their institutional investor clients are responsible to discharge):

  • From a hypothetical service provider - "We aren't going to implement best practices X, Y and Z until the institutional investor requires us to do so. Otherwise, we're spending money we don't have to spend." 
  • From a hypothetical consulting firm - "We couldn't possibly engage in all of the best practices you recommend because of the costs to implement. We can't charge our clients enough to recoup our outlays."
  • From a hypothetical institutional investment executive - "We just assumed that our vendors are doing what they need to do in order to vet qualitative and quantitative risks appropriately.

No doubt lasting changes are underway with respect to industry participants, pricing structure and investment governance policies and procedures. With turmoil, there is tremendous opportunity to do well by doing good. We are excited about what the future holds in terms of investment best practices.

]]> Asset Allocation Alchemy http://seekingalpha.com/instablog/178595-susan-m-mangiero/25539-asset-allocation-alchemy?source=feed 25539 Some states such as North Carolina are legislating more choices for state retirement funds. According to "Pension fund to get new options" by The News & Observer reporter David Ranii, the Tar Heel State Treasurer will soon have the ability to allocate to junk bonds and Treasury Inflation Protected Securities ("TIPS").

In "Asset allocation survey 2009," Mercer LLC queried European pension funds and uncovered a "continuing focus on risk management and recognition that good governance can improve the investment performance of institutional investors." Notable is the result that mature defined benefit plans tend to reduce their exposure to equity markets in favor of fixed income.

In contrast, Dr. David Gulley, Managing Director at Navigant Consulting, suggests that an exit from equity could be ill-advised for investors seeking returns over many years. In "A Surprising Bear Market Lesson About Bullish Projections" (Law360, July 2009), Dr. Gulley writes that "a substantial and objective body of evidence shows that equity returns are reliable in the long term" and that a positive equity risk premium is "actually a requirement enforced by the market's ability to deny money." If true, the impact is potentially sweeping. For one thing, a migration to Liability-Driven Investing ("LDI") which tends to favor fixed income might prove costly later on. Pension plan decision-makers seeking to reallocate away from long only strategies might incur transaction costs now, only to add opportunity cost to the mix if and/or when the sun rises again in stock land. The net result could be a doubling up of bad news bears (or worse).

Absent a universal acceptance about the role of stocks versus everything else, the debate about optimal strategic and tactical asset allocation mix will no doubt continue for many years to come.

]]> Tue, 01 Sep 2009 02:13:37 -0400 Some states such as North Carolina are legislating more choices for state retirement funds. According to "Pension fund to get new options" by The News & Observer reporter David Ranii, the Tar Heel State Treasurer will soon have the ability to allocate to junk bonds and Treasury Inflation Protected Securities ("TIPS").

In "Asset allocation survey 2009," Mercer LLC queried European pension funds and uncovered a "continuing focus on risk management and recognition that good governance can improve the investment performance of institutional investors." Notable is the result that mature defined benefit plans tend to reduce their exposure to equity markets in favor of fixed income.

In contrast, Dr. David Gulley, Managing Director at Navigant Consulting, suggests that an exit from equity could be ill-advised for investors seeking returns over many years. In "A Surprising Bear Market Lesson About Bullish Projections" (Law360, July 2009), Dr. Gulley writes that "a substantial and objective body of evidence shows that equity returns are reliable in the long term" and that a positive equity risk premium is "actually a requirement enforced by the market's ability to deny money." If true, the impact is potentially sweeping. For one thing, a migration to Liability-Driven Investing ("LDI") which tends to favor fixed income might prove costly later on. Pension plan decision-makers seeking to reallocate away from long only strategies might incur transaction costs now, only to add opportunity cost to the mix if and/or when the sun rises again in stock land. The net result could be a doubling up of bad news bears (or worse).

Absent a universal acceptance about the role of stocks versus everything else, the debate about optimal strategic and tactical asset allocation mix will no doubt continue for many years to come.

]]> What is the Proper Role of an Investment Consultant? http://seekingalpha.com/instablog/178595-susan-m-mangiero/14515-what-is-the-proper-role-of-an-investment-consultant?source=feed 14515  In response to my post about the merger of Towers Perrin and Watson Wyatt ("Two Giants Merge - Que Pasa?" June 29, 2009), I wrote that generalists are finding it tough going in terms of assisting pension decision-makers, in large part because the issues that confront them are becoming more complex.

Though my statement was not directed to any particular firm and reflected what I often hear from pension executives, one reader took me to task.

He wrote: "The folks who work at Towers Perrin (disclosure: that would include me) and Watson Wyatt are hardly generalists. One argument in favor of the merger is that it will allow an even greater depth of talent and more specialization, enhancing the ability to assist clients with these increasingly specialized decisions."

In speaking to industry experts about the consulting industry in general, several trends appear to be taking hold. They include:

  • Greater tilt towards specialization under one roof if seen by investment executives as being easier than contracting with multiple parties
  • A desire to have a consultant wear the hat of fiduciary continues to have appeal if it is affordable, noting that most organizations will logically charge more for greater liability exposure
  • Strident calls for transparency with respect to who is doing what, how and on what basis in terms of fees and buy-sell relationships

Keep in mind that while consultants are being asked to do more, there are tremendous pressures to contain costs on the part of the organizations that write checks. There is no doubt that the investment consulting world is starting to change. As with any period of tumult, opportunities are there for those who know where to look.

]]> Sun, 19 Jul 2009 14:15:19 -0400  In response to my post about the merger of Towers Perrin and Watson Wyatt ("Two Giants Merge - Que Pasa?" June 29, 2009), I wrote that generalists are finding it tough going in terms of assisting pension decision-makers, in large part because the issues that confront them are becoming more complex.

Though my statement was not directed to any particular firm and reflected what I often hear from pension executives, one reader took me to task.

He wrote: "The folks who work at Towers Perrin (disclosure: that would include me) and Watson Wyatt are hardly generalists. One argument in favor of the merger is that it will allow an even greater depth of talent and more specialization, enhancing the ability to assist clients with these increasingly specialized decisions."

In speaking to industry experts about the consulting industry in general, several trends appear to be taking hold. They include:

  • Greater tilt towards specialization under one roof if seen by investment executives as being easier than contracting with multiple parties
  • A desire to have a consultant wear the hat of fiduciary continues to have appeal if it is affordable, noting that most organizations will logically charge more for greater liability exposure
  • Strident calls for transparency with respect to who is doing what, how and on what basis in terms of fees and buy-sell relationships

Keep in mind that while consultants are being asked to do more, there are tremendous pressures to contain costs on the part of the organizations that write checks. There is no doubt that the investment consulting world is starting to change. As with any period of tumult, opportunities are there for those who know where to look.

]]> ww consultants consulting Two Consulting Giants Merge - Que Pasa? http://seekingalpha.com/instablog/178595-susan-m-mangiero/10443-two-consulting-giants-merge-que-pasa?source=feed 10443

With the news of Towers Perrin and Watson Wyatt merging to form Towers Watson, tongues are wagging about what this means for the employee benefits consulting business in general. According to the June 28, 2009 press release, the all stock deal "will create one of the world's leading professional services firms."

The combination comes at an interesting time. Besides the economic rollercoaster we've been riding, there is a real debate about the role of consultants, particularly whether they will wear the hat of pension fiduciary, functional or otherwise. Additionally, many of the decisions that challenge pension executives are increasingly specialized, making it difficult for generalists to assist. Then there is the issue of fees and whether "traditional" firms can prosper as competition mounts. The offering of asset management services by select consultative organizations illustrates their respective desire to juice up revenue, despite the possible conflicts of interest that ensue.

Whether the Watson Wyatt - Towers Perrin deal is a harbinger of things to come remains to be seen. One thing is sure. The advice and consulting business is changing rapidly.

Disclosure: No positions

]]> Mon, 29 Jun 2009 04:13:52 -0400

With the news of Towers Perrin and Watson Wyatt merging to form Towers Watson, tongues are wagging about what this means for the employee benefits consulting business in general. According to the June 28, 2009 press release, the all stock deal "will create one of the world's leading professional services firms."

The combination comes at an interesting time. Besides the economic rollercoaster we've been riding, there is a real debate about the role of consultants, particularly whether they will wear the hat of pension fiduciary, functional or otherwise. Additionally, many of the decisions that challenge pension executives are increasingly specialized, making it difficult for generalists to assist. Then there is the issue of fees and whether "traditional" firms can prosper as competition mounts. The offering of asset management services by select consultative organizations illustrates their respective desire to juice up revenue, despite the possible conflicts of interest that ensue.

Whether the Watson Wyatt - Towers Perrin deal is a harbinger of things to come remains to be seen. One thing is sure. The advice and consulting business is changing rapidly.

Disclosure: No positions

]]> ww consulting pension Watson Wyatt Towers Perrin