Fiduciary Management – Goldman Sachs Asset Management

This material has been communicated in the United Kingdom by Goldman Sachs Asset Management Internationalwhich is authorized and regulated by the Financial Services Authority (FSA). Copyright © 2008, Goldman, Sachs & Co. All rights reserved.

Fiduciary Management – Goldman Sachs Asset Management

Responsible pension fund management is very demanding in terms of time and expertise. To help manage your returns,it is important to find a partner whose interests are aligned with yours. At Goldman Sachs Asset Management, we tailorour fiduciary capabilities to match your fund’s specific needs. We bring you our knowledge of the global investment marketsand our market leading risk management systems to help you achieve your investment aims. We give strategic investmentadvice, select and monitor external portfolio managers and provide customised integrated reports to help deliver you peaceof mind. We believe that where there is accountability, there is trust.

For further information please contact Ruud Hendricks on +44 (0) 20 7774 1354

or Pepijn Heins on +44 (0) 20 7051 1890

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Fiduciary Management

A new way forward for Europe?

June 2008

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How the fiduciary model works in practice .................................................................... 2Guest view: Anton van Nunen ........................................................................................ 5Case study: Pensioenfonds Vervoer ................................................................................ 7Overview of fiduciary mandates ..................................................................................... 7Case study: Pensioenfonds MITT .................................................................................... 8Table of fiduciary managers and services ....................................................................... 9Outlook report: Germany and the Nordic region ........................................................ 10IPE Portfolio Management Functions survey ................................................................ 12Illustration of governance, investment process and fiduciary management .............. 15Illustration of fiduciary management classifications .................................................... 16

CONTENTS

IPE JUNE 2008 �

Fiduciary Management is published as a supplement to the June 2008 issue of Investment & Pensions EuropeEditor: Liam Kennedy; Contributors: Pirkko Juntunen, Anton van Nunen, Carolyn Bandel, Jucelia PilattiCover illustration: Andy Potts

IPE International Publishers Ltd, 320 Great Guildford House, 30 Great Guildford St, London SE� 0HS, UK. Tel: +44(0)20 726� 0666, Fax: +44(0)20 7928 3332, Web site: www.ipe.com, ISSN �369-3727

Investment & Pensions Europe is published monthly by IPE International Publishers Ltd. No part of this publication may be reproduced in any form without the prior permission of the publishers. Printed by Hastings Printing Company, Drury Lane, St Leonards-on-Sea, East Sussex TN38 9BJ.INVESTMENT & PENSIONS EUROPE

FIDUCIARY MANAGEMENT

The rise of fiduciary management in the Netherlands since 2002 has also coincided with the move of consultants to offer what is termed implemented consulting. And since the fiduciary management concept rests on best-of-breed outsourcing to external providers, it has been easy to make a comparison with multi management and

implemented consulting models.The models are to some degree an answer to similar questions: pension funds frequently do not have the resources

in house to implement their strategic asset allocation, to select and monitor the right managers, and to comply with increasingly onerous regulation.

But, as is argued in this supplement, fiduciary management in its purest form is a distinct approach, and more comprehensive than either implemented consulting or multi management.

The simplest way to look at fiduciary management is to see it as an investor-led approach. It is not a product, and cannot be replicated in any standardised or pooled form since it entails extensive tailoring of investment services to clients’ needs. Or, as it is described in this supplement, it is a ‘solution pull’ and not a ‘product push’.

The intensity of the relationship between investor and provider in the fiduciary management model means that capacity is a key factor. Not all providers may be able to offer the level of service that the fiduciary model demands, and this is now a key area of due diligence for Dutch pension funds and their advisers when assessing the market.

Adopting the fiduciary management approach does not entail less work for the board members or trustees of a pension fund. It still requires these fiduciaries to set the strategic goals of the pension fund and the strategic asset allocation. They can expect a close on-going relationship with the fiduciary manager.

The case studies in this supplement (pages 7-8) show that fiduciary managers can also offer a faster route to tactical exposure to asset classes that are considered undervalued – such as financials following the recent credit crisis. Such exposure can be implemented more quickly than would often be the case in the traditional pension fund model, where the investment committee and the main board would probably both be involved in the due diligence and the ratification of the decision.

Dutch fiduciary managers now have assets under management in excess of €100bn, and may be approaching a natural plateau of demand in the Netherlands. But the approach has attracted interest in other countries.

The UK National Association of Pension Funds discussed the fiduciary approach at one of its recent conferences. Two firms, Mn Services and Goldman Sachs Asset Management (GSAM), both presented the concept at an event in Sweden recently.

At the same time, Mn Services is looking to offer a fiduciary management concept in the UK, and Cardano has been in London for a year now. GSAM has recently been awarded two German pension fund mandates.

Likely adaptations of the fiduciary management model may be partial outsourcing models, whereby alternatives could be outsourced in a dedicated alternatives portfolio. BlackRock has implemented one such mandate in the UK for Cumbria County Council.

Terminology is sometimes the enemy of clear communication. The term fiduciary management has been useful for a wide array of Dutch providers in describing their somewhat similar services. But given that wide range of approaches, and the use of the term ‘fiduciary’ in UK and Irish law, it is unlikely that it will catch on in those markets, or indeed in other markets. This probably has very little bearing on the adoption of the concept in practice, however.

The governance constraints of increasing regulatory and investment complexity have been a key factor behind the growth of the fiduciary management model in the Netherlands. Given the fact that these conditions also apply elsewhere in Europe, it is our view that there will be some demand for fiduciary-type services in other countries.

Aside from the issue of terminology, it is also unclear who will be the successful providers of this new type of investment service. We already see Dutch providers entering the UK market and looking at other countries with interest. Perhaps the most successful providers will be the ones with the resources to explain the concept to pension funds and the wider market. Healthy competition will also assist them in getting their message across.Liam Kennedy, editor, IPE

Fiduciary management – a model for Europe?

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At conferences, pension associations and in pen-sion fund boardrooms the Netherlands over, fiduciary management

of pension assets has been dis-cussed at length in recent years. First coined by Goldman Sachs Asset Management (GSAM), the US asset manager also widely credited with its popularisation, the term has come to describe what is in fact a wide-ranging set of services that would usually be undertaken by pension funds themselves.

The term was quickly and widely adopted by a range of asset managers – domestic asset managers, pension funds and administration specialists, US-based investment houses and multi-managers alike. So by about 2005, more than 20 different providers had adopted the fiduciary management label and were regularly responding to tenders. Some asset managers who were previously critical of the fiduciary label eventually adopted it – so sticky had it become.

Providers and advisers agree on the usefulness of the term to describe an all-in asset management solution providing services along the investment value chain that go beyond multi-asset, multi-management – from ALM to portfolio construction to manager selection to risk reporting. However, those same providers and advisers also concede that the term has its disadvantages.

First, it is essentially meaningless, including in the Netherlands, where the fiduciary duty of pension fund board members cannot be outsourced to a third party. Second, the label is not helpful or indeed appropriate for adoption outside the Netherlands, even if the underlying concept may well be appropriate for markets such as the UK, Sweden or Germany, where GSAM has already picked up two mandates.

The range of services offered by the various managers under the auspices of fiduciary management also differs in details as well as in fundamental concepts. Although more than 20 managers have added a fiduciary offering to their

service palette, or have rebranded an existing strategy as fiduciary management, seasoned observers point out that not all can offer a credible service.

But despite or because of the fiduciary label, discussion of fiduciary management has quickly turned into action on the part of institutional investors and pension funds. A steady stream of mandates has been awarded since GSAM took the first one in April 2002 when health insurer VGZ chose the fiduciary route for the management of its then €1bn.

The April 2005 sale of Philips’ pension fund asset management business to Merrill Lynch Investment Managers (MLIM, now BlackRock) for an undisclosed sum – and the simultaneous appointment of MLIM to run its €12bn in pension assets on a fiduciary basis – marked the fiduciary management route as a clear trend for the Dutch pension industry. Last autumn none other than the pension fund of the Dutch Central Bank (DNB) selected BlackRock for the fiduciary management of its €1bn in assets.

May 2006 saw the award of the assets of the Dutch transport industry fund Vervoer (then €5.4bn) to GSAM, while other multi-billion euro investors like the €3.2bn Merchant Navy fund also opted for the fiduciary route – in this case mandating Mn Services earlier this year. Interestingly, as fiduciary managers in the Netherlands note following these big-ticket

mandates, it is only now that they are seeing more smaller funds opting for the concept.

The science of pension fund governance has developed over the last few years, propagated by such luminaries as Keith Ambachtsheer and Don Ezra in their 1998 book Pension Fund Excellence: Creating Value for Stakeholders.

One reason for the adoption of fiduciary management in the Netherlands has probably been a heightened awareness of pension fund governance, and greater responsibility in law for internal pension fund governance.

And in countries outside the Netherlands, there is also at least a debate and a heightened awareness of how pension funds should structure themselves and the level of resources they should commit themselves to. Or to put it in terms favoured by Roger Urwin of Watson Wyatt: what their governance budget should be. Urwin says pension funds should determine their level of governance and operate accordingly.

At the same time, regulatory demands have been increasing, especially concerning solvency levels in the Netherlands, Denmark and Sweden, but also with respect to the internal governance of pension institutions.

In addition, the range of investments within a typical pension fund portfolio has increased exponentially in the

last 10 years. So where a €500m or €1bn pension fund previously may only have invested in local fixed income and equity, exposure to local currency debt, global real estate, hedge funds and private equity are now normal. Larger pension funds are seeking exposure to commodities alpha, forestry and music rights in portfolios of exotic beta investments. The focus on pension fund governance in conjunction with increasing investment and regulatory complexity have sparked an ever-widening interest in the concept of fiduciary management, both among pension funds and providers.

Who can be a fiduciary manager and how?There are more than 20 providers active in the Netherlands fiduciary management marketplace – from those with a pure play multi-management background, such as SEI, to US players such as BlackRock or GSAM, local asset managers such as ING/AZL, local players with an insurance background, such as Syntrus, and other local players that have grown from the in-house operations of pension funds, such as Mn Services or Cordares.

As the range of backgrounds of the different providers would suggest, each comes to the market with a different business model that emphasises different aspects of the value chain. “I think asset managers and consultants have failed to point out what fiduciary management, as we see it in the Netherlands, is all about,” notes Frits Bosch of Bureau Bosch, describing the thinking behind a recent report which sought to categorise the various approaches, including fiduciary management “the Dutch way” and US multi-management approaches.

For one, there are different attitudes as to whether a fiduciary manager should only appoint external managers or whether some assets should be run by the fiduciary manager where it has a credible strategy, not least to save on costs.

Goldman Sachs’ approach stems from its New York-based private client manager selection capability, and its model is to outsource all asset management to external parties. The likes of SEI and Russell, also active in the Netherlands, naturally operate on a multi-asset multi-manager basis.

Others, like Mn Services, developed from the in-house investment capabilities of pension funds themselves. Mn Services manages around 50% of its assets internally – euro fixed income and equities, and emerging market bonds.

Jan Bertus Molenkamp, senior fiduciary manager at Kempen Capital Management, believes

How the fiduciary model works in practiceWith assets in excess of €100bn and a track record that stretches back six years, fiduciary management has sparked considerable interest and debate both in the Netherlands and further afield. Liam Kennedy interviewed senior executives at fiduciary management providers for this assessment.

Hendriks: ‘role of consultants’

Molenkamp: ‘align interests’

Bosch: ‘capacity issues’

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the question of internal or external responsibility for pre-defined functions is not the most important issue. “It’s more about making sure interests are aligned,” he says. Kempen itself outsources most areas of asset management, apart from some niche areas where it is strong, such as small cap equities.

Corestone, the Swiss-based manager selection unit in which Robeco has a financial interest as part of its fiduciary offering, emphasises the implementation aspects of portfolio construction. “Manager selection and research in the context of portfolio construction is one of the most important issues,” says Martin Mlynár, CEO of Corestone. “You can set strategic asset allocation but if you don’t implement it properly the intended effect of that in the long run could be jeopardised. What we have learned over the last five years is that implementation will make or break the result for the pension fund. What is implementation? It is a clear investment policy, manager selection, risk management, and proper monitoring, managing the tactical exposure within the asset allocation.”

Syntrus Achmea Asset Management (SAAM), uses the term financial pension management, which it says can be seen as fiduciary management plus. This includes ALM, risk management and advice, and balance sheet management. Syntrus Achmea is the largest third party pension fund servicing company in the Netherlands .

Otto Veldt, director of SAAM, believes the most important advantages for clients in fiduciary management are broad access to knowledge and products, continuity, and purchasing power when, strategic advice, balance sheet management and external managers come into question. Veldt sees Syntrus’ ability to deliver integrated reporting both on the asset as well as on the liability side and on the condition of the balance sheet as one of his firm’s key advantages. “A lot of managers and consultants provide reports on one or more components but we have moved towards integrated risk and balance sheet reports,” he says. “It is especially hard for small to mid-sized pension funds to organise this themselves.”

Some fiduciary managers have offered add-on services, such as transition management or global tactical asset allocation (GTAA). In the case of GSAM, its GTAA strategy has been less successful. Ruud Hendriks of GSAM emphasises that in the early days of fiduciary management, GSAM was one of the few GTAA providers with a good track record, so it seemed to be a logical idea to include this capability.

All agree that choosing to offer fiduciary management puts more onus on asset managers to focus on the client to provide a tailored range of services to the investor.

The client focus is extremely important, stresses Molenkamp. “The client’s need for a solution may be new in a commercial sense because it was not commercially offered before. This is less about product push and more about solution pull.”

Another challenge is to achieve the balance between customisation and standardisation: “Fiduciary management is less about assets than about the number of clients you serve,” adds Daan van der Werf, director at Kempen. He believes a provider can hope to service a maximum of 25-30 fiduciary clients successfully.

Others in the market observe the danger of capacity problems if fiduciary managers absorb assets without the necessary in-house operations to manage and service the clients: “Fiduciary

management is becoming so popular that capacity problems will occur,” says Bosch.

What does the client need to do?A fiduciary manager provides a greater range of service along the value chain of institutional investment decision making, from ALM through to monitoring and reporting. However, in the Netherlands, but also in countries like the UK, fiduciary duty cannot be outsourced, so ultimate responsibility still rests with the pension fund’s board.

If an internal investment team is present, the appointment of a fiduciary manager does not make them redundant. On the contrary, if the fiduciary model represents a step forward for an investor in introducing investment diversification that was not present before, the investor may even need to step up its internal resources, by appointing internal staff or external experts, such as consultants, to sit on the investment committee.

There is a consensus that strategic asset allocation should

remain the province of the pension fund’s board itself. As Johan Cras, managing director for institutional investment services for Europe at Russell Investments, puts it, allowing a provider to determine strategic asset allocation is like asking a lawyer to draw up your will.

If fiduciary management is about retaining in-house control of strategic policy, rather like the supervisory board of a company, then a pension fund needs to consider carefully the internal structure needed to manage the fiduciary manager – who is responsible for detailed investment knowledge and day-to-day oversight – on a long-term basis.

Although some pension funds with strong internal governance have opted for the fiduciary route, others, like the Vervoer transport fund, went to fiduciary management from a total outsourcing model, with a pension administrator and a balanced manager. For Vervoer

this meant building up an internal management support office.

“Clients should see us as their investment department,” says Van der Werf of Kempen. “The board members are still responsible in the end for the investments so they have to monitor us. If you choose fiduciary management you only have one point of contact and that is why we see an important role for consultants as adviser to the board or sitting on the investment committee.”

There is little consensus on how to judge the performance of the fiduciary manager and over what timeframe. Since there is also no standard template for fiduciary management, Dutch pension funds have paid particular attention to service level agreements.

“You can benchmark manager selection but ALM, advice and strategic advice is more difficult,” notes Veldt. “It is possible to benchmark components, for example, if you use derivatives for risk management you can measure the effectiveness of the hedge. But you cannot easily benchmark the effectiveness of an ALM, which

may have a horizon of 15 years.”He continues: “Fiduciary

management is not meant automatically to be a replacement of your existing organisation. You see a lot of examples where there are hybrids, where tasks are divided between the pension fund and external parties. For instance, on the strategic side, you see large pension funds organising overall policymaking themselves while relying on the policy and implementation support of fiduciary managers.”

Mlynár emphasises the importance of management information in the reordered board structure. “An annual report is not enough to manage a company,” he says. “You need monthly management information and I believe the communication between the asset manager, consultant and the board needs to be similar to the communication between the divisional director of a multi-national and a CFO and a supervisory board. Management

information is the instrument to steer the company, or in this case to steer the pension fund allocation.”

FeesBureau Bosch recently produced a report that segments the various approaches to fiduciary management. Frits Bosch of Bureau Bosch notes that fees for fiduciary management are trending upwards: “But if you have alternatives in the portfolio, this makes it difficult to compare the various modes,” he concedes.

The Bosch report also notes that the average fiduciary portfolio costs 34 bps; 11 bps higher than the average actively managed portfolio, which comes at a cost of 23 bps.

The level of the risk premium and the managers’ remuneration is of course the subject of discussion between client, manager and consultant. Molenkamp says actions will be different according to the benchmark that is defined. “Often asset based benchmarks are used to evaluate the fiduciary manager where liabilities plus a risk premium provide a better

Traditional management Fiduciary management

Portfolio Manager(s )

Financial Reporting

Consultant(s )

Performance Measurement External

Manager

Custodian

Client

External Manager

E xternal Manager

Custodian

Performance Monitoring

Consolidated Reporting

Consultant

Portfolio Construction

Overall Risk Management

Client

Fiduciary Manager


Portfolio Manager(s )

Financial Reporting

Consultant(s )

Performance Measurement External

Manager

Custodian

Client

External Manager

E xternal Manager

Custodian

Performance Monitoring

Consolidated Reporting

Consultant

Portfolio Construction


Client

Fiduciary Manager


Source: Goldman Sachs Asset Management



JUNE 2008 IPE4

aligned benchmark. There is potential for huge misalignment in using asset based benchmarks. If, for example, we think equities are going down we will underweight equities, but not to the same extent as if we have the liabilities of the pension fund as our benchmark,” he says.

Hendriks is concerned about the low level of fees – it is understood from market participants that one recent mandate was awarded for 10 basis points all-in. He doubts that providers offering such low fees can provide the necessary service: “The only way they can do that is by managing a lot of the assets passively, by not including alternatives, and by putting a lot of funds in the portfolio. This worries us,” he says. Consultants, adds Hendriks, have a role to play in educating the market about the appropriate level of fees for an appropriate level of service.

“As large sums are invested at specific addresses inefficiencies will disappear, and closet indexing will be the result at active fees,” notes Bosch. This is not in the interest of participants.”

Role of consultantsMarket observers note that consultants were lukewarm about fiduciary management in the

Netherlands in the early years of the concept – particularly since it came about just at the same time as the likes of Mercer were planning to launch their own multi-manager services, from the basis of their own manager search and selection capabilities.

But this situation has changed, and fiduciary managers emphasise that they work closely together with consultants. “Nowadays you see more and more consultants advising clients about fiduciary management,” notes Van der Werf. “There are also now a larger number of investment managers offering fiduciary services, so consultants are examining more closely what the pension fund is looking for, and which fiduciary manager is most suitable for them. They will not only analyse the investment side, but also service and the culture.”

He also notes potential conflicts of interest for consultants where they operate in so-called implemented consulting, which involves a greater degree of decision making power for the adviser in manager selection and portfolio implementation. However, consultants have gone to lengths to explain the Chinese walls that they have in place to

prevent competitive information leaking from manager or fiduciary manager selection staff to the implemented consulting or multi-manager area.

“Another concern is that there is no transparency,” continues Hendriks. “You would find it very difficult to get comparable performance information. I have never seen the performance figures of others and there is no objective organisation that can provide performance information for a pension fund considering hiring a fiduciary manager. A consultant must be well educated and be able to explain to clients the variables behind the figures, such as asset allocation or tracking error.”

OutlookThe clearest way to view fiduciary management is perhaps to look at it as one of several answers to the complex of problems outlined earlier in this article: increasing regulation, governance requirements and investment complexity.

That trend is likely to continue both in the Netherlands and else-where, so even though fiduciary management may not see many more years of exponential growth in the Netherlands, there are good

reasons to suppose that the same drivers and impulses will apply in markets such as the UK or Germany.

Whether those services are branded fiduciary management or not is largely immaterial since terminology is not the issue here – it is more the growing awareness of the capabilities needed to manage a modern pension fund portfolio in the light both of regulatory and investment frameworks that are increasingly demanding.

The wide range of services on offer in the current fiduciary management marketplace only serves to emphasise that there is no single overarching definition of fiduciary management. The types of providers of fiduciary or similar services will also broaden as consultants and multi-managers continue to develop and provide their own products.

At the same time, successful providers will evolve to enhance and refine their offering. And new entrants to the market in the form of PGGM and APG Investments (formerly ABP Investments) will add considerable asset management, manager selection and risk management skill to the Dutch market and possibly also abroad.

Fiduciary management in summaryl Fiduciary management does not involve the complete outsourcing of investment responsibility. Rather, it is about a new way of organis-ing and devolving some aspects of fiduciary responsibility.

l The board or trustees of a pension fund should in always retain responsibility for setting the strategic investment goals for the port-folio. On an on-going basis, the board should focus on directing and governing the fund relative to these strategic goals.

l Institutional investors already outsource some aspects of their fidu-ciary responsibility when they work with external investment manag-ers – an external manager should always act in the fiduciary interest of an institutional investor in any case.

l Fiduciary management is not a packaged multi manager solution. It involves a high level of customisation to the individual investor’s needs.

l The fiduciary manager works in partnership with the board of the pension fund, and its investment committee or its in-house team, on an on-going basis. The investor should expect a high level of contact with the fiduciary manager.

l Some fiduciary managers outsource all investment mandates to third parties on a ‘best of breed’ basis; others will want to manage some assets themselves. Opinions differ as to the various options available in the market and an investor should evaluate the different approaches care-fully to ensure their needs and goals are catered for.

l Pension funds and other institutional investors must carefully evalu-ate the service level agreement to ensure that they receive the right mix of active management and service in respect of the fee paid.

l Some fiduciary managers can also cater for the partial outsourcing of one part of the portfolio, such as alternatives, where the due diligence and manager selection tasks may be too onerous for the investor.

l Consultants are an important party, in the selection and evaluation of fiduciary managers and to advise on an on-going basis.



It is occasionally suggested that fiduciary management is not very different from other models such as multi-man-agement and implemented

consulting. However, given the breadth of tasks of a fiduciary, it is evident that fiduciary manage-ment is more than just multi-man-agement.

In fiduciary management, the construction of an efficient portfolio, producing maximum returns given the risk budget, is more crucial for future returns and the risk profile. Multi-management can be part of this structure, but is not per se. Given a pension fund board’s preferences and given the liabilities and accompanying risk budget, a multi-manager portfolio can be – and most of the time will indeed be – the optimal outcome of the calculations.

Implemented consulting may be able to approach the fiduciary concept quite closely, but it should be devised differently to the way it is now. The consultant should be more or less embedded in the fund, not giving his thoughts and advice on a limited number of days per year. He should exhibit skills and experience in different areas such as the translation of the ALM outcome into investment terms, portfolio construction, manager selection and the interpretation of portfolio results. In short, he should show all the characteristics of a good fiduciary except for the responsibility the fiduciary has in the execution.

Fiduciary management, therefore, is a management model in its own right and not a purified form of an existing model. Perhaps the best advocate of this is Frank Russell’s director of strategic advice, Don Ezra, who in an address to a Russell Investment Conference in 2006 defined best practices in pension management in a way that makes them identical with fiduciary management. He said: “The acceleration of multi-manager structures is evidence of fiduciary management taking hold. Recent

evidence shows, that the question ‘why?’ has changed into the questions ‘what?’, ‘how?’ and ‘who?’. Fiduciary management has become accepted as a necessary part of good governance.”

The evolution of institutional investing has seen a move from a balanced manager as the sole provider of investment management to employing a whole range of asset managers, each responsible for a small part of the overall portfolio, in an attempt to grasp the benefits of diversification.

The first concept is based on the fallacy that one manager can be the best in all relevant asset classes, and suffers from a low degree of diversification. The second has the disadvantage that expertise lies with the people who have no responsibility for the whole portfolio, while those with responsibility are not experts.

That meant investors made extensive use of consultants. But they too have only a limited purview. Moreover, overall risk management is difficult, not to say absent, as there is no integral responsibility delegated to these consultants. The result was an ineffective organisation lacking the preparation needed for good strategic decision making.

Introducing the fiduciaryAvoiding the disadvantage of having just one manager while retaining responsibility for the overall portfolio, of which parts were run by specialists, has led to the introduction of the fiduciary manager.

Fiduciary management provides comprehensive risk management, although a number of independent specialists run parts of the investment portfolio. It can oversee strategic decision making and organise effective governance. The fiduciary manager provides five key functions:q Advising the board of the plan

sponsor;q Constructing an efficient investment portfolio;q Selecting asset managers;q Monitoring those managers;q Reporting on the investment process.

AdviceA fiduciary offers a pension fund a combination of expertise and a commitment to the overall management of the plan, including asset liability studies, balancing risk and return considerations. It also diversifies as much as is efficient and generally educates the plan’s trustees and the sponsor’s staff about a range of issues confronting them. The fiduciary may not necessarily carry out the asset liability studies, although this is a possible service. However, the manager can provide a specialist with critical market information, evaluate the study’s outcome and generate ideas about its the investment side by offering input on asset classes, additional data about correlations between investments, and so on.

More importantly, the fiduciary can help the fund decide what exactly to do with the outcome of the study. The board, which in general will have a limited knowledge of and experience in investments, should choose a risk budget that is stated in terms with which it is familiar, such as a maximum probability of having a certain amount of underfunding. The fiduciary should then be able to translate this neutral budget into investment terms, guiding the choice of asset classes, their benchmarks and the level of active policy.

Portfolio constructionOnce a fund has come to grips with the broad issues associated with its approach to investing, it can formulate the specifics of its investment approach.

A portfolio is no longer an aggregation of discrete, promising investment ideas, it is a top-down construction of assets among a set of asset classes, followed by sub-allocations within some of

those asset classes, possibly supplemented by active and dynamic management. The fiduciary achieves a large degree of diversification and manages risks using state-of-the-art models for dealing with correlations that are different and vary over time.

The fiduciary brings expertise to this complicated issue and a holistic approach, wherein the plan sponsor can still discern its target within the detailed calculations. After all, the decision as to what asset classes are to be, and to what degree, is a decision that cannot be delegated, even if the fund wanted to. To a large extent, these strategic decisions determine the outcome of the investment process and with that the degree of indexation possible, and the level of contributions needed.

This is a very important exercise as, with the introduction of more stringent funding regulations and of IFRS, more and more pension funds tend to match assets and liabilities. Adherence to regulatory demands is increasingly preferable the advantages of diversification and the prospect of generating higher returns. Adequate calculations to achieve a combination of high aspirations and reasonable risk can avoid sacrificing the wellbeing of pensioners and ease of mind of the fund’s decision makers.

Selecting and overseeingOnce the strategy has been determined, specialist managers have to be selected and mandated to invest the funds. The fiduciary should know all the managers available for each asset class or

investment category, should be able to employ them (while entry could be difficult or impossible for the fund itself), and should have the data

necessary to predict to a certain degree

that the managers show skill,

and, when the fund has decided to use active

managers, produce excess returns above a defined benchmark.Moreover,

the fiduciary can suggest combinations of managers in some fields whereby the combined risk is lower than that of the individual

The third phaseFiduciary management is the next stage in asset management, says Anton van Nunen. He outlines the concept, reviews the Dutch experience and assesses its potential for other countries

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managers involved. These benefits of diversification, together with the lower fees the fiduciary is able to achieve on behalf of the client, should improve the fund’s long-term revenue picture.

MonitoringOnce the portfolio is contracted and the managers mandated, the investment process can proceed. From day one, it is the task of the fiduciary to monitor the portfolio by measuring risk and return at the level of the managers, the (sub) portfolios and the overall portfolio level.

But interpretation is as important as measuring, and for that adequate benchmarks are needed. The fiduciary’s task is to advise on benchmarks that extract the best results from asset managers and enable the fund to understand the results achieved. Absolute returns will enable the plan sponsor to judge how the investment process has contributed to the set of specified goals. Both absolute and relative returns will make it possible to compare the achievements to those of peers and will show whether or not risks taken have been rewarded. The first aspect specifies the more or less urgent need to improve results; the second indicates the possibilities to do so.

ReportingControl by a pension fund’s board is not easy without transparent reporting by the fiduciary. It enables the sponsor to know exactly what has been achieved in terms of return and risk and how these results relate to benchmarks, peers and the fund’s goals.

The reporting format should be according to the wishes of the plan sponsor and also comply with regulations. It should be at a level that enables management to read it and provide more in-depth information to allow specialists to understand the intricacies of the results. Both should be based on data validated by an independent custodian.

EducationThe detailed alternatives offered, often based on complicated calculations, may require the plan sponsor to receive some training.

A pension fund board must deal with different parties pursuing their own agendas. Employees want secure assets but also higher benefits. The plan sponsor wants low risk in the fund’s balance sheet but also low contributions. Investment managers claim to generate high returns and low risk. Advisers claim to have solutions for all kind of problems.

A fiduciary can educate the relevant executives so that they can make the right decisions on all these issues. It can also inform the board on questions that go beyond those of day-to-day business, such as trends and developments

in financial markets and in the regulatory environment.

Dutch experienceIn less than five years, assets under fiduciary management have increased from zero to more than €100bn. Pension funds, both company and industry-wide, insurance companies and endowments have appreciated the theoretical considerations and hired Dutch, French and US fiduciaries to put them into practice. Institutions, ranging from some €100m to €8bn, have entered the area, indicating that the concept as such not only enables smaller institutions to incorporate the best approaches in the market to investing, but appeals to the larger funds as well.

Experience shows that this new approach has created important changes in several fields. Investment policy has changed dramatically: more asset classes, and within them different assets, are used, and more managers are employed to diversify further.

Discussions with asset liability experts and asset managers have become more complex, as have the portfolios, especially in the field of risk. And in that the fund is supported by the investment skills of the fiduciary.

As the fiduciary fulfils a whole range of duties in a more diversified portfolio, the age-old question arises: who guards the guardian. Consequently, the investment committee’s role is often enhanced to cope with these more sophisticated investment policies concerning more assets, combinations of alpha and beta products and extended calculations. The committee should also support the board in its judgment of the fiduciary’s value-added. The custodian can also play a role here, delivering the data to calculate the improvements in risk and return.

Compared with the pre-fiduciary phase, the custodian already has a more extended role because of the increased complexity of the investment portfolio. The reality is that in some cases the existing custodian has had to be replaced because of that.

Communication with the regulatory authorities is also different, as the enhanced professionalism of the fund, in conjunction with its fiduciary manager, creates more room for dialogue instead of one-way directives.

Last there is a change in the level and structure of costs. A fiduciary fee adds an extra layer of costs in addition to already existing asset management fees. When the fund chooses to employ a large degree of active management, these fees will probably rise too; best-in-class managers often demand higher remuneration.

But increasingly, sophisticated portfolios with diversifying

mechanisms and a more skilled array of managers should outweigh extra costs. And the fiduciary’s purchasing power can reduce management fees to a certain degree.

Still, there is the certainty of higher costs on the one hand, next to the probability of higher returns on the other. This often is an uneasy situation, especially for Dutch institutions, accustomed to low management fees. Performance-related fees would seem to be a solution here. Making the fiduciary fee to a large extent dependent on results makes it easier for funds to pay for services.

Positive experience has been gained by linking fees to the realised information ratio instead of outperformance. In the former case, the fiduciary is rewarded even if the outperformance is less than it could have been in situations where markets do not reward risks as they should be rewarded. In that case it is good policy to allocate less risk in the markets and the fiduciary is not punished for this sound consideration.

All of these changes have occurred in the Netherlands and may be expected elsewhere. They hint at an institutional sector that has gained in sophistication.

Research by large consultants Erik van Ockenburg, a principal at McKinsey, told JP Morgan’s Annual Dutch Pension Fund Seminar last year that fiduciary management is stimulated both by the demand and supply sides. Demand is pushed by new, stricter regulations; the need for higher returns than those generated by traditional investment vehicles and by higher standards in the use of risk management tools. Where larger funds have no problems with regulation, search all markets for higher returns and use the most sophisticated tools, smaller funds with ambition find a solution in the employment of a fiduciary.

On the supply side, pension funds realise they can sell their internal management to third parties, enlarging their scope and reaping the benefits of economies of scale. Asset managers try to copy the higher margin of retail business by extending service to institutional clients. Loyalty, notoriously low at institutions, is thereby increased as well.

In a 2007 survey of some 100 major Dutch corporate pension funds, KPMG found that 58% saw governance – with its aspects of risk management, expertise, regulation and continuity – as the most important issue over the next few years. To cope with requirements in these respects, fiduciary management can be an alternative to mergers, liquidation or seeking shelter in an industry-wide scheme. Indeed some 50% of the sample indicated this concept

could be a fit, while the other half was not familiar with it.

This rather high number bodes well for further success of the fiduciary concept. Even more astonishing was the finding that 70% of the larger pension funds were contemplating fiduciary management as the successor of their management models. One would expect that the concept would be more tempting for smaller funds that find the gap between the increasing complexity of the business and in-house capabilities more problematic than the larger ones.

KPMG, which in the meantime is offering searches for fiduciaries on behalf of institutional clients, concludes that fiduciary management is here to stay as it integrates, oversees and co-ordinates all the fund’s operations.

Beyond the NetherlandsIt is highly probable that fiduciary management will take hold in other countries given that financial regulations are becoming increasingly strict and complex in nearly all developed countries, and international financial reporting standards are putting a strain on funds worldwide. International companies want to diminish the impact of pension funds on their balance sheets and many want greater separation from them. Greater responsibility for funds and less interference by the plan sponsor requires a stronger governance structure, and fiduciary management is delivering just that.

And expectations of less favourable investment possibilities and future returns in all countries are additional stimulating factors. Should they prove correct there is additional need for better ways to organise investment management. Therefore, it is probable that the Dutch example will find many followers abroad.

In the meantime some fiduciary contracts have been signed in Austria, Germany and Switzerland.

The UK, which is also showing interest in the concept, is a special case because of its existing phenomenon of fiduciary trustees. External advisers perform additional duties to the more familiar consultants as they are legally responsible for the fund’s performance. This more extended position is an extra reason for considering the introduction of a fiduciary manager. Through his experience and expertise, the fiduciary manager is well placed to take over some responsibilities that the fiduciaries may be happy to share.

An inhibiting factor may be the name of the concept: a fiduciary manager next to a fiduciary is not a very efficient way to define responsibilities.Anton van Nunen is the author of ‘Fiduciary Management: Blueprint for Pension Fund Excellence’

IPE FIDUCIARY Overview.indd 6 3/6/08 11:52:06

Pensioenfonds Vervoer, the €8bn Dutch industry-wide pension fund for private transport workers, was one of the first funds

to wholeheartedly adopt the con-cept of fiduciary management in 2006.

Patrick Groenendijk, CIO of Pensioenfonds Vervoer, explains the strategic thinking behind hiring Goldman Sachs Asset Management as its fiduciary manager, rather than remain with a balanced mandate at F&C Management: “The decision was taken at board level in 2005 for several reasons,” he says.

“The fund was already 100% outsourced to an insurer, and had no internal organisation or investment professionals. Secondly, the Dutch regulator, DNB, changed the regulatory framework so that if you outsourced your pension fund you would be required to have professional monitoring capabilities in-house, ie an internal organisation. And thirdly, performance was an issue where the assets were managed in a balanced mandate.

Groenendijk says because of the size of the fund and the lack of an internal organisation a fiduciary management solution was a natural choice. The in-house investment team was set up in 2005 and now consists of Groenendijk and a colleague working part-time.

“At the time we hired an independent consultant, with a stress on independence because we were aware that a lot of investment consultants offer fiduciary-type solutions and we

wanted to receive an unbiased view,” he says.

“We started the selection process in a fairly conventional way through IPE-Quest, where we posted a list of questions to gauge an initial reaction, after which we sent out an RFP.”

He says it became apparent that many of the companies responding claimed to be able to manage the assets as a fiduciary manager, but few actually fulfilled the criteria. “In particular, many of the balanced managers called themselves fiduciary managers but they would use their own asset management capabilities, and what we wanted was true manager diversification.”

He points out that in 2005 there were around six or seven managers who were truly capable of fiduciary management.

After a beauty parade, Vervoer decided on GSAM. “The degree to which GSAM could offer bespoke or tailor-made solutions which were relevant to our specific fund, rather than a one-

size-fits-all formula, was crucial,” Groenendijk says. In addition, he notes, GSAM had already set up a specific team for the task of picking external managers that fit Vervoer’s needs.

Vervoer’s board continues to set the strategic investment policy on an annual basis with advice from the in-house investment team, which is then implemented by GSAM.

Groenendijk says asset allocation is also changed once a year but there is flexibility to act more quickly, should the need arise. He cites August

2007 as an example. “We received a phonecall about the opportunities in the credit markets, created by the extreme volatility at the time. From agreeing the parameters of the investments, the mandate was implemented within one week.”

On a practical level Groenendijk and his colleague communicate

with GSAM on an almost daily basis. “In addition, we receive monthly and quarterly reports and also visit the managers with GSAM. It is, after all, a people business and it is vital to get to know the people who actually manage our assets,” Groenendijk says.

Apart from getting to know

European fiduciary mandates 2002-08Sponsor Amount Date Winner Selectionreasons Previous ConsultantSBVD ( Neths ) €125m(1) May 2008 F&C Investments n/s n/s n/sBertelsmann ( Germany ) €2.7bn(1) April 2008 n/s n/s n/s n/sBpf PSL ( Neths ) €250(1) April 2008 Blue Sky Group n/s n/s Watson WyattMerchant Navy ( Neths ) €3.2bn(1) March 2008 Mn Services Quality of services/understanding fund’s nature n/s n/sWheel & Tyre Scheme ( Neths ) €150(1) February 2008 Mn Services n/s n/s n/sTVM Verzekeringen ( Neths ) €450(1) February 2008 ING/AZL International exposure n/s KPMGRandstad ( Neths ) €390(1) December 2007 Kempen Anglo-Saxon quality/Dutch mentality n/s Avida IntlAtradius ( Neths ) €180(1) December 2007 Fortis Investments LDI funds n/s n/sTNO ( Netherlans ) €2bn(1) September 2007 BlackRock Track record in FI, securities & LDI n/s Avida IntlPME ( Neths ) €21bn(1) May 2007 Mn Services High returns, low admin, flexible services n/s n/sSBZ ( Neths ) €2.3bn(1) February 2007 ABN Amro & Russell n/s n/s Avida IntlKPN ( Neths ) €4.5(1) January 2007 TKP Professional management consultancy n/s n/sAon Group ( Neths ) €250(1) January 2007 TKP Greater flexibility at lower cost n/s n/sZorgverzekeraar CZ ( Neths ) €700m January 2007 Goldman Sachs AM Good returns within the risk framework n/s n/sCargil ( Neths ) €261(1) December 2006 Mn Services n/s n/s Mercer Inv ConsVervoer ( Neths ) (2) n/s September 2006 Mcube AlphaEngine n/s n/s n/sCampina ( Neths ) €1bn(1) August 2006 Goldman Sachs AM Risk budgeting, customer service, long-term policy Interpolis/AZL & Robeco Anton van NunenStichting Pensioenfonds OCE ( Neths ) €750m June 2006 Goldman Sachs AM n/s n/s n/sPensionfonds Vervoer ( Neths ) €5.4bn May 2006 Goldman Sachs AM More diversification F&C Goris & PartnersVopak ( Neths ) €210m February 2006 Mn Services n/s n/s n/sCampina ( Neths ) €350m January 2005 Goldman Sachs AM n/s n/s n/sZorgverzerkeraar VGZ ( Neths ) €1bn(1) April 2002 Goldman Sachs AM Clients benefits from good management n/s n/s

Notes:(1)Fundvalue.(2)fiduciaryoversight;n/s=notstated.Summarydatabasedoninformationinthepublicdomain.Source:IPE

IPEJUNE2008 7


Casestudy:PensioenfondsVervoer

Groenendijk: ‘fiduciary natural solution’

Management

Participants’ council

Complaints committee

Accountant

Pension advisory committee

Investment advisory committee

Actuary

Offices of the directors

CustodianPVF Nederland N.V. Fiduciary investment manager

AM AMAMAM AM

Pensioenfonds Vervoer at a glanceFull name: StichtingPensioenfondsVervoerAssets: €8bnFiduciary manager: GoldmanSachsAssetManagementSub funds: PFFreightTransport(longdistancefreight and mobile crane hire sectors) PF Personal Transport (taxi and bus transport sectors) Early Retirement Fund Freight TransportParticipants: 155,000Deferred participants: 370,000Pensioners: 40,000Employers: 8,600

Source: Pensioenfonds Vervoer

IPE FIDUCIARY case studyCase.ind7 7 3/6/08 11:52:59


JUNE2008IPE8

the investment process and people of the underlying mangers, Groenendijk has ongoing discussions with GSAM about topics such as responsible investing, new additional asset classes and operational issues.

Those criticising the fiduciary approach often cite manager reporting as a problem, but Groenendijk disagrees. “We have not experienced any problems with reporting. GSAM has built a solid business and the Chinese walls prevent them from using the material they get from external asset managers. If they were even to use this material once to gain any competitive advantage, the reputational risk would be so great that that would wipe out any potential advantage that the information could have given them,” he says.

He admits that in a project of this size there is always room for improvement, and 2007, for

instance, did not deliver what was expected in terms of performance. “Last year was difficult for many active managers and the same is true for Vervoer.”

On terminating underperform-ing managers, Groenendijk says this is in the hands of GSAM because the firm is paid according to performance. “Of course we also have a dialogue with the managers and would discuss underperformance in our regular meetings,” he says.

What could work better? Groenendijk cites speed: “GSAM is a large US entity and it is very compliance and legal-driven, which can slow things down. On the other hand, with the current regulatory environment we do need someone with the compliance and legal capabilities that GSAM offers,” he notes.

Overall Groenendijk is happy with the service offered by GSAM, noting that the main goal is the

make the portfolio work more efficiently than it has done so far. “Markets are not exactly helping our fund to grow at the moment but because our member base is young we do have more contributions than pension payments which are going to grow for some time.”

Vervoer invests a third in equities, 47% in fixed income and the remainder in alternatives such as real estate, GTAA, commodities and hedge funds. The outperformance target is 1% per year on a long-term basis, with a tracking error budget of 200 bps.

Groenendijk says that with hindsight, “I don’t think we would have done things much differently except to take manager diversification much more seriously and set up the executive office earlier.

“In addition, today we have a much greater awareness of and

focus on risk. Increased awareness of risk has led us to currency hedging and a closer look at the fund’s interest rate risk versus liabilities. We recognise that we are more than just an investment manager, and as a pension fund need to look after our liabilities and invest in order to meet those liabilities.

“This has been stimulated by the creation of the new financial assessment framework in the Netherlands, the FTK, which came into force at the beginning of 2007. We think it is a very positive development that the implementation of ALM – which was already well known in theory 10 years ago – has now been taken seriously.

“Furthermore, over the last decade, our portfolio has become less reliant on equity markets and we have diversified into alternatives.”Pirkko Juntunen

The route of the €950m Dutch industry pension fund for the fashion, interior, carpet and tex-tile industries (MITT)

was relatively uncomplicated. The new fund inherited the concept following its inception in 2006 after the fund for the clothing industry, since early 2005 with Mn Services, and the textile fund, at the time with AZL, merged to form MITT.

“The clothing fund had just completed a selection process in 2004, with a beauty parade of five managers and they eventually chose Mn Services,” says Jan Hasselman, board member and the chairman of the fund’s investment committee. “Since the appointment was still very new, we decided not to go through the process again, and only had to make a decision between Mn and AZL.”

The fund chose Mn Services, which is larger and has more assets under management than AZL, in the belief that the manager would be able to deliver a broader range of services because of its size. Secondly, MITT was attracted by Mn’s broader range of investment categories.

The fiduciary manager now manages almost all aspects of the fund’s investment management, including strategic and tactical advice as well as operational investment decisions. MITT prefers this outsourcing model since it finds itself to have greater flexibility and agility to make decisions now that there are no more consultations with multiple managers.

“As a fund’s management,

you should not make such investment choices by yourself because you do not have enough expertise in-house,” says Hasselman. He argues such a lack of expertise does not apply only to MITT but also to other funds, since the management of Dutch pension schemes is still split between employers’ and employees’ representatives. “These are of course people who have some knowledge of investments, but they are no investment experts,” he adds.

Instead, the board’s primary responsibility, Hasselman finds, is to select the right asset manager and to supervise the investment management. Hence, there is no in-house investment team, although MITT’s investment commission meets together with Mn Services once every quarter. At these meetings MITT is assisted by Watson Wyatt: “We have an investment consultant so that we have enough expertise to be able to give some level of resistance,” comments Hasselman.

MITT is happy about the level of communication with its fiduciary manager: “Once every month we receive a report of around five pages, giving us an overview of what is going on, while every quarter we receive an extensive report, which is then discussed.” Hasselman adds that he also has

a very good relationship with the Mn Services account manager, which he values.

Transparency is also a consequence of the fund’s own involvement, says Hasselman: “As the investment committee you are responsible for the investment results.” All things being equal, it is the committee’s job to obtain the information it needs.

Even though the fund is content about the co-operation, it finds the Mn Services’ performance has sometimes been disappointing. “The benchmarks are not always beaten. You look for an active investment manager, and the goal within a certain bandwidth of risk is to beat the benchmark. That doesn’t always happen.” On the

other hand, admits Hasselman, one should look at such developments over a longer period of time.

Despite the underperformance, MITT has been able to overhaul

its investment portfolio and to achieve a degree of innovation. The fund has started investing in

commodities, has allocated 1% to infrastructure, and has moved into high yield bonds.

Most recently, the scheme has invested in cheap bank loans. “As a consequence of the sub-prime crisis, banks have got into trouble. The spread on that sort of loan has increased enormously; it has a much higher yield and you can reasonably reduce your

risk.” This idea was proposed by the fiduciary manager, and the fund started investing within four weeks.

Responsible investing is one very distinct area in which the fund has gone it alone – earlier this year, MITT signed the UN’s Principles of Responsible Investing (PRI). “Within the textile fund we already had ING screening our portfolio for us, and we had strategies to make our investments more sustainable. Mn Services did not have that service, so we decided, with the support of Mn Services, to sign the PRI.”

Overall though, MITT’s investment mix has become more refined since the fiduciary mandate. The fund currently invests around 25% of its assets in equities, which are split up in US, Europe, Asia and emerging markets. Another 50% is invested in fixed income, with a proportion now allocated to high yield and bank loans. Lastly, there is a 25% allocation to commodities and real estate.Carolyn Bandel

Casestudy:MITTpensionfund

Hasselman: ‘committee responsible for results’

Pensioenfonds MITT at a glanceFull name: StichtingBedrijfstak- pensioenfondsMode- Interieur-, Tapijt- en TextielindustrieAssets: €950mFiduciary Manager: MnServicesParticipants: 13,500Deferred participants: 96,000Pensioners: 36,000Employers: 900Source: MITT

IPE FIDUCIARY case studyCase.ind8 8 3/6/08 11:53:00

Aegon Altis BlackRock Cardano F&C Fortis Goldman IM Inv Inv(19) SachsAMInt

10,552 13,000 17,000 40,000 38,500 32,852 18,000

F F F (10) F F F13 11 (9) 70+ 581 88 9

13,000(4) 17,000 (11) 38,500 32,852 30,000374,000 13,000 921,000 250+ 140,997 331,876 NA

Int Int Int;AC(12) Int Int(20) IntInt Int Int Int Int Int IntInt Int Int Int Int Int IntInt Int Int Int;AC(13) Int;EC(17) Int(21) IntInt Int Int Int Int Int IntInt Int Int Int Int Int IntInt(1);EC(2) Int Int Int Int Int IntInt Int Int EC(14) Int Int IntInt Int Int Int Int Int IntInt EC(5) Int EC(5) Int Int Int(3) (15) (18) (22) (24)

1989 2004 2005 2000 1950 1995(23);F:2002 19991989 2005 2005 2001 1950 1995(23);F:2002 19993 22 3 50+ ND 88 8 X X X X X X X

X X X X X XX X X X X X X X X X X X X (6) (25)

21 17 40+ 65(16) 800 61 119

Providers of fiduciary management and similar services

CompanynameTotalfiduciarymanagement/multi-manage-mentAUMforEuropeaninstitutionalclients(€m)Preferredtermforserviceoffered(F=Fiduciary;M=Multi-manager;NumberofEuropeaninstitutionalclientsTotalF/MAUMforworldwideinstitutionalclients(€m)TotalgroupAUM/consultedassets(€m)Servicesprovided(Int=Internally;AC=Byanassociatedcompany;EC=Byanexternalcompany):-ALM-Strategicassetallocation-Riskbudgeting-Managerselection-Portfolioconstruction-Riskmanagement-Portfoliorebalancing/tacticalassetallocation-Performancemeasurement/monitoring-Consolidatedreporting-Legalandcompliance-Other

Yearstartedfiduciary(orsimilar)servicesYearoffirstmandatewinMandatesimplementedoverlastfiveyearsClientsservedunderfiduciarymanagement:Pensionfunds:-Company-Industry-wide/multi-employer/professional-Publicsector-Other

LifeinsuranceFoundation/charity/non-profitOtherTotalstaffinworkinginF/M

CompanynameTotalfiduciarymanagement/multi-manage-mentAUMforEuropeaninstitutionalclients(€m)Preferredtermforserviceoffered(F=Fiduciary;M=Multi-manager;NumberofEuropeaninstitutionalclientsTotalF/MAUMforworldwideinstitutionalclients(€m)TotalgroupAUM/consultedassets(€m)Servicesprovided(Int=Internally;AC=Byanassociatedcompany;EC=Byanexternalcompany):-ALM-Strategicassetallocation-Riskbudgeting-Managerselection-Portfolioconstruction-Riskmanagement-Portfoliorebalancing/tacticalassetallocation-Performancemeasurement/monitoring-Consolidatedreporting-Legalandcompliance-Other

Yearstartedfiduciary(orsimilar)servicesYearoffirstmandatewinMandatesimplementedoverlastfiveyearsClientsservedunderfiduciarymanagement:Pensionfunds:-Company-Industry-wide/multi-employer/professional-Publicsector-Other

LifeinsuranceFoundation/charity/non-profitOtherTotalstaffinworkinginF/M

INGIM Insight Kempen Mn Robeco Russell SEI State SyntrusEurope IM(Global) CM Services AM Inv StreetGA AchmeaAM

19,000 0 3,568 60,000 5,668 121,000 60,000(35) 262,985 45,000

F/M F F F F (31) M (7) F96 0 23 20 12 283 495 692 73

64,900 0 3,568 60,000 1,969 718,000 60,000 1,353,625 45,000153,000 148,612 13,200 60,000 139,361 776,000 134,000 1,353,625 85,000

AC(26) Int EC Int EC Int Int;EC(33) NA IntAC(26) Int Int Int Int Int Int NA IntAC(26) Int Int Int Int Int Int NA IntInt;AC(26) Int Int Int Int Int Int NA IntInt;AC(26) Int Int Int Int Int Int Int IntInt;AC(26) Int Int Int Int Int Int Int Int;AC(8)

Int;AC(26) Int Int Int Int Int Int Int IntInt;AC(26) Int Int Int Int;EC(30) EC(32) Int Int IntAC(26) Int Int Int Int;EC(30) Int Int Int IntInt;AC(26) Int Int Int Int Int Int Int Int 2005 2008 2006 2003 1997 1969 1990 1978 20022005 (27) 2006 2004 1997 NS 1990 1978 200270 0 23 13 12 184 c250 1,801 4

X X X X X X X X X

X X X X X X X X X X X X X

X X X X XX X X X X X(8) (28) (29) (34) 55 NA 13 135 26 98 322 513 101

Footnotes:NA= Not available; NS= Not stated; ND= Not disclosed; c= Circa

(1) Rebalancing(2) TAA; external GTAA fund(3) Regulatory reporting(4) Fiduciary, €12bn; multi manager, €1bn(5) Work with a legal adviser on investment management issues(6) Family offices and sovereign wealth fund

(7) Investment manager(8) Cardano Risk Management(9) European firmwide institutional segre-gated clients, 1,230; European institutional fiduciary clients, 3(10) Solvency management, risk manage-ment and investment management(11) Risk management mandates, €40bn; investment manangement,€1bn(12) Analysis conducted by Cardano and ORTEC (strategic partner)

(13) Team includes Cardano and Altis staff(14) Each client appoints as external, inde-pendent performance measurer(15) Solvency management, derivatives execution, administration, pricing and col-lateral management(16) Including Altis staff(17) Investment Manager Selection (IMS)(18) Local relationship management, train-ing and development(19) Response for combined entity of Fortis

Investments and ABN AMRO Asset Manage-ment(20) Coordiante process performed by an external consultant(21) Open architecture approach(22) Client care, regulator reporting(23) Integrated LDI mutli-asset solutions(24) Full implementation(25) Reinsurance, death insurance(26) AZL(27) Not yet awarded any mandates

(28) Family offices(29) Indemnity insurance and funeral insur-ance companies(30) Custodians(31) Able to provide all three services(32) BNY/Mellon(33) Provider depends on jurisdiction of client(34) Family offices, healthcare(35) Global figureSource: IPE survey

IPE JUNE 2008 9

FIDUCIARYMANAGEMENT

IPE FIDUCIARY Table P09 FINAL.in9 9 3/6/08 11:55:06


JUNE 2008 IPE10

GermanyGermany has caught the eye of fiduciary managers recently, especially since Henkel and Bertelsmann awarded fiduciary mandates, both to Goldman Sachs Asset Management (GSAM). Some others are thought to be pondering the step.

Domestic providers, such as Feri Institutional Advisors have also introduced the concept of implemented consulting, which includes some aspects of fiduciary management, to the local market. Feri’s implemented consulting model offers a broad range of services such as asset allocation, ALM, manager selection and research. Mercer is also active in this area.

Deutsche Asset Management has gone on record to say that the concept could represent a logical business step for asset managers with a master KAG – the bundled platform for investors with multiple Spezialfonds mandates, which usually includes associated reporting and compliance functions, and sometimes associated services such as tactical asset allocation. Allianz Global Investors Deutschland and its life insurance cousin, Allianz Lebensversicherungs AG, have also created a bundled pension solution, a joint subsidiary called Allianz Treuhand, to serve corporate pension clients as trustee. However, this is an all-in solution it is not a fiduciary

management according to the Dutch definition.

There are many reasons why fiduciary management has not yet taken off in Germany in the same way as it has in the Netherlands, although these are disputed among market participants.

Some pension fund sources believe German companies were late in using consultants compared with other countries in Europe, including the Netherlands, which means they are in late in using fiduciary managers. Other pension experts say there is still a mistrust of ‘one-stop shops’ because investors believe it leads to a concentration of power and a loss of internal control.

However, at the time of adopting the fiduciary management concept a Bertelsmann spokesman said: “Fiduciary management offers a co-ordinated process: a ‘one-stop shop’ from the determination of the strategic asset allocation to negotiating the contracts with the asset managers, up to reporting and standardised

risk assessment. This facilitates managing the portfolio.”

This year the group placed parts of its €2.7bn pension reserves – most of them in Germany – in a contractual trust agreement (CTA), leaving €1.1bn in unfunded net pension liabilities. Henkel’s agreement with GSAM is also through a CTA.

Looking outside the NetherlandsPirkko Juntunen looks at factors that might drive demand for fiduciary management in Germany and the Nordic region

Hörger: ‘fiduciary potential’

Pension fundPensions at a reasonable price

DB

DC

Hybrid

Financialplanning(online)

OptimisationMarket differentiation(individualisation)

Product diversification(pension & asset management)

Regulation(FTK, IFRS, PFG, API, Pw)

Co-ordinator

Fiduciary management

Social structure of economies

Pension system:• funded• insurance• consultants’ position

Rhineland

Scandinavian

Anglo-Saxon

Southern European

Traditional unbundled

Diversity in EU

Stakeholder value

Shareholder value

Pension fundPension fund

The bigger picture: what’s driving European pension funds and their investments?

Source: Bureau Bosch

Germany, Sweden, UK.indd 8 3/6/08 11:55:57

IPE JUNE 2008 11


Axel Hörger, head of GSAM’s German operations, says that the fiduciary management concept in Germany is likely going to take a different format than, for instance, in the Netherlands because of local preferences as well as regulations.

“For sure there is further potential here but I imagine it will be more of an advisory model where managers will be proposed by the fiduciary manager and then approved or rejected by the investment commitee of the client,” he says “One reason for this is that many investors want to retain the ultimate say on investment decisions. Furthermore, many companies have existing bank relationships, often supported by credit lines, and thus may want to consider their core banks as well for managing their assets.”

In addition, he can see resistance from chief investment officers in treasury departments, which view this as stepping on their toes, or effectively making them redundant. “At least that is perhaps the fear, although not necessarily true,” he adds.

Hörger believes that domestic insurance companies will aim to get a slice of the fiduciary pie, but perhaps with offering their in-house asset management capabilities in certain areas, such as fixed income and euro stocks.

“Going forward I believe the concept will change in Germany to something like a ‘partnering’ solution on a long-term basis with insurance companies,” he says.

Another route, Hörger predicts, is when larger corporates start pooling their pensions and themselves becoming a fiduciary manager. “Of course this is a highly complicated exercise because of the different taxation laws, legal frameworks and regulatory environment across Europe, but it could be done,” he adds.

Hörger believes there is scope to grow but admits that is more likely to be two to three mandates per year rather than 10.

Dirk Söhnholz, managing director of FIA, agrees with Hörger in that the concept has yet to take hold and probably will have a different format, such as international co-operation of different fiduciary-module providers, but still as one stop-shop in the end, rather than the sole-provider solution as in the Netherlands.

Söhnholz says that although the fiduciary management is an attractive concept, the UK model of pensions buy-out companies is something that may fit Germany better. “The specific German environment and the reluctance to outsource everything to one party, because no provider has yet proved that they are the best in breed in every single aspect of the outsourcing process, could benefit a form of buy-out structure in the future,” he says.

He believes that if industrial and non financial-service companies start focusing even more on core functions and cost cutting, getting rid of their own asset management capabilities will make outsourcing more attractive.

Söhnholz says FIA’s concept of implemented consulting is not identical with fiduciary management and predicts that competition in the field will most likely arise from insurers, who will boost their capabilities and add more services. “Or perhaps some will adopt the Mn Services route and actually start competing for business from pension funds, after having grown their in-house capabilities.”

The Nordic regionFiduciary management, as defined in the Netherlands, is yet to take hold in Sweden. However, some Dutch fiduciary managers have at least considered exporting their

know-how to Scandinavia. GSAM and Kempen Capital Management held a seminar for investors in Sweden earlier this year.

However, the term ‘fiduciary’ is not likely catch on. In the IPE survey of European pension funds in this supplement (pages 12-14), where 23% of respondents were from the Nordic region, it is clear that the name causes confusion and some believed it to be more of a back-office outsourcing strategy, rather than what the Dutch term fiduciary management.

Some argue that the concept, whatever you call it, is not new and that the Swedish pension and insurance industry in many ways already offer the concept. One example is Alecta, which manages the pensions for 27,000 companies in a monopoly-like deal.

Mats Langensjö, head of Nordic business development for Pioneer Investment, and who was an investment consultant for many years, most recently at Aon, says that for historic and cultural reasons, insurance companies have taken on the bulk of pension management, where the legal framework and tax regulations have benefited this type of arrangement.

A more recent indication for the future was the Folksam and Swedbank merger last year. Folksam, the pension insurer, decided to get out of asset management and outsourced its capabilities to Swedbank, adding SEK170bn (€18bn) to Swedbank’s AUM, effectively making Swedbank a fiduciary manager.

The two are co-operating in other fields as well in order to leverage their core capabilities. There were some critical voices in Sweden at the time, pointing to the fact that Folksam did not conduct a public tender to select the best provider in the market.

Elsewhere in the Nordic region, market observers point to Denmark as a frontrunner. “You

could argue that PKA and others which are a conglomerate of several pension funds, cooperating initially on administration, are actually fiduciary managers,” says one Danish investment consultant who declined to be named.

The concept of outsourcing in the Nordic region is incredibly strong and continues to grow. “Where you can see this most clearly is in the separation of production and distribution among fund providers, particularly in Sweden,” Langensjö says.

He says the switch from defined benefit to defined contribution solutions in is moving the debate forward and there are discussions about how to organise internal staff and on the optimal investment solutions. “Some pension funds are also discussing the advantages of scale, particularly in administration. Once they move beyond the size and cost advantages on administration and IT, it is likely that this may move to other areas and towards the Danish model,” he predicts.

He also points out that the drivers for outsourcing, whether fiduciary management or not, are that in an increasingly complex and competitive investment environment, companies cannot afford mediocrity in any areas, but particularly not in asset management.

Langensjö also points at increasing regulatory pressures are making it harder for companies to maintain the highest level of quality in all areas of operations.

He believes the current Swedish environment, where pensions are insured with one provider, is set to change because there is so much pressure on performance and risk management. He says the roles of administration, asset management, IT and administration are beginning to unbundle, with specialist providers emerging.

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JUNE 2008 IPE12

Internal management and asset allocationIn total, 60 pension funds and institutional investors from 16 European countries, with assets of some €412bn, responded to our survey. The largest group of respondents came from the UK and Ireland (14) and the Nordic region (14), with 12 from the Bene-lux countries – of which most were from the Netherlands.

The Nordic respondents had the largest asset pool, of over €171bn. Of the participants a third came from company pension funds and 43% from public and industry-wide schemes.

Our survey found that out of total assets the largest proportion of respondents (from a sample of 58 that answered this question), 54% of funds managed at least some of their assets in-house, while 46% of respondents out-sourced all of their assets to exter-nal providers.

The largest number of external managers are used by respond-ents in the UK and Ireland, with an average of 41.5, although this number includes one large foundation with more than 200 asset managers. France and the Nordic countries follow with 23.5 and 17.6 respectively, out of 57 respondents.

UK and Irish funds had the larg-est equity allocation, at 60%. The average equity holding among the funds was 35%.

Italian funds were the largest investors in real estate with an allocation of 36%, compared with the average of 11%, whereas Portuguese funds held 25% in cash, compared with an average of 7%. Hedge funds, private equity, commodities and other alterna-tives still only make up an average of 6%.

Diversification continues to be a topic for funds seeking to boost returns, increasing the complexity of managing pensions and at the same time ensuring that outsourc-ing, in whatever form, is likely to continue.

The survey shows that, of 59 respondents, 56% said they would diversify into other asset classes beyond equities and fixed income,

while 44% said they would diversify their equity portfolio and 46% their fixed income portfolio.

Decision-making and delegationOf 58 respondents, 46% outsource all assets. Of the remaining 54%, 16% of the total outsource 1–10% of assets, although 22.25% out-source over 50%. The decision-making structure of the European funds surveyed appear quite uniform in that, out of 58 respond-ents, 65% said that the board of trustees was the highest invest-ment decision-making body while 16% cited a board of directors.

Over half (56%) of the respond-ents delegate certain functions internally, with 45% choosing asset allocation, the most common function to be delegated. Over a fifth, 21%, delegate all investment functions. Most (66%) delegate to is an investment committee.

Some 91% (of 58 respondents), the largest proportion, said they select managers internally. Other functions that are also still con-ducted internally for the majority are risk budgeting (86%), strategic asset allocation (84%). A total of 79% of the respondents conduct portfolio rebalancing internally.

On the use of external service partners, one third use actuarial consultants, mainly for asset/liability management and strategic asset allocation (SAA: 14%). Invest-ment consultants are used for performance measurement (22%), SAA (21%) and manager selection (19%). Custodians are mainly used for consolidated reporting (31%) and performance measurement and monitoring (28%).

These arrangements seem to be ingrained in the way pension funds work but as competition increases among the service pro-viders with lines blurring between asset managers, consultants and other providers, this is likely to change slowly, with new entrants such as investment banks and full-service providers perhaps also get-ting a slice of the cake.

Of 32 respondents who answered the question, 66% said the main reason for delegating portfolio management functions was to

IPE Portfolio Management Functions Survey In conjunction with this supplement, IPE conducted a survey of the portfolio management outsourcing practices, and attitudes towards fiduciary management, of 60 European pension funds and institutional investors in 16 countries, with assets totalling €412bn. Pirkko Juntunen gives an overview of the results.

Part I: Outsourcing practices of European pension funds

Pension fundCompany 20Industry-wide 13Public sector 13Other (utility) 1Life insurance 1Foundation/charity 6Other* 1

* Others: asset management company, bank treasury, caisses de retraite, corporate with pension obligations within balance sheet, investment bank, social security foundation

1. Respondents by type

Austria 3Benelux 12France 2UK/Ireland 15Greece 1Italy 3Nordic 14Portugal 2 Spain 1Switzerland 7

2. Respondents by country

Austria $0.9bnBenelux $52.6bnFrance $38.5bnUK/Ireland $98.8bnGreece $0.5bnItaly $7.5bnNordic $171.3bnPortugal $3.7bnSpain $7.2bnSwitzerland $30.7bn

3. Assets by country

Equity 35%FI govt/sovereign 24%FI corporate bonds 11%FI other 6%Real estate 11%Cash 7%Private equity 2%Hedge funds 2%Commodities 1%Other alternatives 1%

4. Average strategic asset allocation

All respondents

All respondents

All respondents

All respondents

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IPE JUNE 2008 13


improve risk management, 59% cited the increasing complexity of financial markets and 50% said they wanted access to new ideas and opportunities.

A quarter said access to external manager databases, outsourcing to professionals, an easing of the workload on specific projects and local law dictated this while inde-pendence of external providers and the lack of suitable staff were other reasons.

The survey also asked about future outsourcing habits. It seems that hiring external providers on an advisory basis is more attractive than hiring them on a discretion-ary basis, indicating that some funds are keen to keep their control as well as develop their internal capabilities.

This is something that has hap-

pened for instance in the Nordic region with the AP funds in Sweden and the Government Pen-sion Fund – Global in Norway.

Looking at staffing levels across Europe, the survey shows that, out of the 53 that answered the question, Nordic funds employ the highest number of professional staff, at 12, compared to average levels of six

professionals. However, the high-est overall number of staff is in Italy with a total of 35, of whom 31 are support staff. Portugal and Switzerland have the lowest number of staff at five, with three and four professional staff respec-tively.

Respondents stated that, on an advisory basis, between 22% and 25% would consider delegating ALM, SAA, risk budgeting, manager selection and portfolio construc-tion to an investment consultant and 27% would consider outsourc-ing ALM to an actuarial consultant. However, a significant proportion, approximately a third, would not consider delegating any functions to external providers.

On a discretionary basis, 16% of 51 respondents would consider outsourcing portfolio measure-

ment and monitoring to a cus-todian and the same number are considering them for consolidated reporting.

Some 10% are considering del-egating risk management to an investment consultant, the same number are considering outsourc-ing consolidated reporting to such parties, with 12% considering delegating performance measure-ment to investment consultants as well. However, a similar number are considering consolidating this in-house, although it is not clear whether this involves bringing the activity back in-house following an outsourcing agreement.

When asked why they had opted not to outsource, 56% of the 32 respondents cited expense as the main reason. Half said they were satisfied with the past and present risk management provision and 47% cited the strength of their in-house team. Only a fraction, 3%, said they wanted to keep a strong governance function in-house.

ConclusionA large proportion of the investors surveyed manage money inter-nally, and the number of in-house investment professionals shows that there are good reasons why many will seek to continue with their current investment arrange-ments. Most outsource one or other portfolio management func-tion and a range of providers are involved.

Professionals Support staffAustria 4.3 2.3Benelux 2.4 1.9France 7.0 16.5UK/Ireland 4.8 2.0Greece 3.0 4.0Italy 4.0 31.0Nordic 12.0 11.5Portugal 3.0 2.0Spain 14.0 2.0Switzerland 4.0 1.0Average 6.0 7.053 respondents

6. Investment staff employed

AverageAustria 15.6Benelux 10.2France 23.5UK/Ireland 41.5Greece 6.0Italy 8.0Nordic 17.6Portugal 13.0Spain 0Switzerland 13.6Average 1557 respondents

7. Number of external managers

% Yes NoEquities 44 54Fixed income 46 54Other 56 3259 respondents

8. Plans to diversify

Number %Trustee board 38 65Board of directors 9 16Investment committee 5 9Management committee 3 5Stiftungsrat 3 558 respondents

9. Highest investment decision-making body

Number %Respondents delegating 33 56

FunctionsdelegatedAsset allocation 17 45All 8 21Manager selection 7 19Other 616

NameofbodyorindividualInvestment committee 23 66Director/CEO 6 17Board 2 6Other 4 11% of all respondents

10. Delegations to other internal bodies

% Internal Actuarial Investment Custodian Master Multi- Fiduciary Other consultant consultant KAG manager managerAsset/liability management 52 33 17 3 – – 2 2Strategic asset allocation 84 14 21 – – 2 3 2Risk budgeting 86 5 16 2 – 2 2 3Manager selection 91 2 19 – 2 – 3 2Portfolio construction 78 2 17 2 2 9 5 3Implementation 71 – 10 5 2 7 7 5Risk management 72 – 12 5 2 7 5 5Portfolio rebalancing/TAA 79 – 9 3 2 3 7 5Performance measure/monitor 59 2 22 28 2 2 3 9Consolidated reporting 62 3 17 31 2 – 3 2Legal and compliance 78 3 5 17 2 2 3 22% of 58 respondents

11. Responsibility for portfolio management function

%Satisfied with returns 44Satisfied with risk management 50Strength of in-house team 47Doubts re handing over control 41Potential expense 56Legal/regulatory constraints 19No time to consider change 19Cost 44Keep strong governance function 3% of 32 respondents

12. Reasons for not outsourcing

Survey highlights

l Survey respondents: 60 institutional investors in 16 countries with total assets of €412bn

l Mean fund size: €7.3bnl In-house investments: 54% of respondents manage money internallyl Staffing: an average of six professional and seven support staffl Investment assets: fixed income 41%; equities 35%; others 24%l Diversification: 56% plan to diversify assetsl Delegation: 56% delegate functions to an internal body, eg investment

committeel Asset manager selection: 91% select asset managers themselvesl Grounds for outsourcing: improved risk management, financial market

complexity and access to new opportunities were the main reasons citedl Grounds for not outsourcing: 56% cited expense; 56% were satisfied

with risk management and 47% cited strength of in-house teaml Fiduciary management: 76% said they were familiar with the terml Choosing fiduciary management: a quarter of respondents said fiduciary

management will become popular although half offered no opinion and most said they are not likely to opt for it

l Criteria for choosing a fiduciary manager (where used): service, fees, trust, experience, track record and reputation

Some internal management54%

No internal management46%

% of 58 respondents

5. % of assets managed internally

‘It seems that hiring

external providers on an

advisory basis is more

attractive than hiring them

on a discretionary basis,

indicating that funds are

keen to keep their control

as well as develop their

internal capabilities’



JUNE 2008 IPE14

Part II: Perception of fiduciary management in Europe

Number %Yes 45 76No 14 2459 respondents

13. Familiar with term ‘fiduciary management’?

NumberGSAM 9Mn Services 7Kempen 6F&C 5BlackRock 3SEI 3

14. Most often mentioned fiduciary management providers

NumberYes 15No 15Don’t know 656 respondents

15. Will fiduciary man-agement become more popular in your country?

NumberVery likely 0Likely 9Unlikely 4455 respondents

16. Will your institution consider fiduciary management in future?

Our survey shows that the con-cept of fiduciary management is apparently understood by most investors. It is not clear, however, that investors are ready to adopt the approach as it is understood in the Netherlands. Nevertheless, 76% of respondents said they were aware of the concept. Furthermore, some 25% of respondents said they thought fiduciary management would become more popular in their country, although half ven-tured no opinion and a further 25% said it would not.

The respondents that already use a fiduciary manager, mostly Dutch funds, said that the most important criteria for selecting a manager are quality of service, fees, trust, experi-

‘Some stated a wider

problem of first having to

pool all their assets from

their various European

funds for fiduciary manage-

ment to make sense’

ence, track record and reputation whereas criteria such as ability to provide return and ability to match or outperform benchmark also featured.

Two respondents said the impact on the workload for the in-house teams where a fiduciary manager was appointed was non-existent – in line with the general view among fiduciary managers that the model does not represent a reduc-tion in work for in-house staff, rather a re-orientation of activi-ties. Other comments were: “saves about two hours work a day” and “easier oversight and helps in deci-sion-making”.

In total, 44 of the respondents said they were unlikely to consider fiduciary management, nine said they were likely to but none told us they were very likely to. However, this should be balanced with the fact that fiduciary managers tell us that the concept requires time and effort to explain to pension funds in detail.

Some of the reasons given for not taking the fiduciary management route were that it was perceived to provide no added value and that there was a preference for internal fiduciary models to stay on top

of pensions issues. Some stated a wider problem of first having to pool all their assets from their various European funds for fiduci-ary management to make sense. Another said its role as a public fund made fiduciary management problematic compared with funds in the private sector. A further respondent said that because the pension fund professionals are still responsible for the returns they would not outsource all compe-tences.

Comments included:• no added value;• preference for internal fiduciary

model to stay on top of things;

• will be needed to implement pooling of assets of the various European funds;• we are a local government pen-

sion fund and therefore different to the private sector;

• our fund will still have to bear the consequences of investing. We will thus not entirely transfer the competences; and

• this is an ongoing process.The best-known fiduciary man-

agers mentioned were GSAM, Mn Services, Kempen, F&C Manage-ment, BlackRock and SEI. At the same time over half, 51%, offered no opinion on the reputation of the providers.



IPE JUNE 2008 15

Source: Goldman Sachs Asset Management

How fund governance and decision-making processes can be divided

Example of a typical investment process

How the fiduciary process can work in practice



JUNE 2008 IPE16

Fiduciary management+ (Ultra light)The services of this type of fiduciary manager are used in an unbundled solution, by insourcing their multi-management and additional services on a modular basis. In other cases the fiduciary manager may use internal asset management. The strategic asset mix and evaluation is not determined by the fiduciary manager. No brokerage or custody. A fiduciary manager+ can insource and co-ordinate other fiduciary management services on a best-in-class basis if that is required.

Fiduciary management++ (Light)Extended multi-management. The strategic asset mix and evaluation is not necessarily to be defined by the fiduciary manager. These managers agree with the principle that a fiduciary manager should remain independent, which also implies no brokerage. These asset managers appreciate the presence of consultants to provide an independent evaluation. Fiduciary managers will never fire themselves. This type of fiduciary manager uses a multi-management model, sometimes in combination with home made-products.

Fiduciary management+++ (Medium) Balance sheet management of the pension plan is central in this approach. The strategic asset mix is defined by the fiduciary manager in conjunction with the client. ALM and risk management studies are performed by the fiduciary manager, or are conducted under the close supervision of the fiduciary manager. The asset management mostly takes place on a multi manager basis. Sometimes this type of manager regards consultants as superfluous as the fiduciary managers take can care of all matters and does feel the need for independent evaluation.

Fiduciary management++++ (Strong)This type of fiduciary manager mostly offers an all-in solution for pension and asset management. Fiduciary asset management as in FM+++. The fiduciary manager additionally offers board advisory services, pension administration and day-to-day pension management.

Fiduciary management+++++ (Ultra strong)Fiduciary management the Anglo-Saxon way. Not offered in the Netherlands as yet. The fiduciary manager takes over the role of the sponsor. The company no longer has the burden of the liabilities on the corporate balance sheet. The manager takes over the risks at considerable lower costs compared to a traditional insurance company. The fiduciary manager guarantees the liabilities including price-indexation. The fiduciary manager benefits from possible investment surpluses of the portfolio of the plan. The fund is closed to new members. But the pension fund is not abolished; its governance structure remain in tact and the trustees keep control.

Caveats:1. This is a classification, not a quality rating and not a ranking For instance: an FM+ manager does a different job than a FM++++, but is certainly not inferior for that reason. A higher score does not automatically mean a better fiduciary management. There is no such thing as the best type of fiduciary manager; this all depends on the matching of the profiles of the manager and the pension plan. 2. Not all elements have to be fulfilled to qualify for a fiduciary management category. That could mean that a manager does fiduciary management but does not offer pension management. 3. Various fiduciary managers have a modular approach. This could imply that an FM++++ is also willing to offer FM+ or FM++ or FM+++.

Approaches to fiduciary management

Five models of fiduciary and fiduciary-type management

FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARY FIDUCIARYMANAGEMENT MANAGEMENT+ MANAGEMENT++ MANAGEMENT+++ MANAGEMENT++++MANAGEMENT+++++SERVICES:

ultralight light medium strong ultrastrong

1. Board advisory services x x2. Pension administration x x3. Fiduciary Asset management a. Advisory * ALM x x x * benchmark x x x x x * risk management & budgeting x x x x x * strategic asset allocation x x x x b. Portfolio construction x x x x x c. Asset management * multi-management x x x x x * transparent MM fees x x x * monitoring managers x x x x d. LDI and overlays x x x x x e. Performance measurement x x x x x f. Reporting x x x x x g. Evaluation & feed back. x x x x x4. Guarantees Liabilites xNotes:(1) Sometimes internal management is also offered in fiduciary medium and strong.(2) A crucial issue is the transparency of sub-manager fees: Which costs are assigned to the pension fund? Which costs are taken by the investor? What are the fees, trading costs? Can the custodian monitor the costs? Which costs are included and which are not?Source: Bureau Bosch

The consultancy Bureau Bosch has devised these fiduciary management classifications

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OBC.indd 1 3/6/08 12:09:30

This material has been communicated in the United Kingdom by Goldman Sachs Asset Management Internationalwhich is authorized and regulated by the Financial Services Authority (FSA). Copyright © 2008, Goldman, Sachs & Co. All rights reserved.

Fiduciary Management – Goldman Sachs Asset Management

Responsible pension fund management is very demanding in terms of time and expertise. To help manage your returns,it is important to find a partner whose interests are aligned with yours. At Goldman Sachs Asset Management, we tailorour fiduciary capabilities to match your fund’s specific needs. We bring you our knowledge of the global investment marketsand our market leading risk management systems to help you achieve your investment aims. We give strategic investmentadvice, select and monitor external portfolio managers and provide customised integrated reports to help deliver you peaceof mind. We believe that where there is accountability, there is trust.

For further information please contact Ruud Hendricks on +44 (0) 20 7774 1354

or Pepijn Heins on +44 (0) 20 7051 1890

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Fiduciary Management – Goldman Sachs Asset Management

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