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REAL ASSETS SPOTLIGHT

CURRENT INFRASTRUCTURE ALLOCATION

As U. S. institutional sponsors ponder where they can (and should) allocate capital to bridge funding gaps in the infrastructure class, many state and local governments are struggling with anemic budgets, while the need to improve America’s infrastructure grows more urgent. High barriers to entry may be associated with certain infrastructure investments given the significant resources and due diligence needed to understand the unique risks and liquidity profile of these long-term assets.

The American Society of Civil Engineers’ March 2013 assessment of the nation’s infrastructure estimated that the U.S. requires $3.6 trillion in infrastructure investment to bring conditions to relatively good standing by 2020. The estimated shortfall is currently $1.6 trillion, or $201 billion annually. The report noted some of the economic inefficiencies created by poor infrastructure: for example, 42% of America’s major highways are

It seems like a perfect match. Given current market conditions, pension funds globally have been trawling for stable, long-term assets; U.S. infrastructure is in dire need of long-term funding to rebuild America. So heightened institutional investor interest in public works opportunities to diversify their portfolios and generate economic benefits for the public and private sectors should be a no-brainer, correct? Apparently, not necessarily. Despite the ostensibly ideal fit, commitments by investors to rebuild America’s roads, bridges, waterways and utilities have so far been markedly thin.

congested, costing the economy $101 billion in wasted time and fuel annually.

Over the last two years, the average global allocation to infrastructure by institutional investors increased to 4.3% from 3.3%, according to Preqin data. In particular, public pension funds globally (with aggregate AUM of $8.3 trillion) had an average actual allocation of 2.9% of assets to infrastructure investments, with an average target allocation of 4.8%.

“Plans are looking for enhanced returns, so they are reducing their allocation to fixed income and increasing their allocation to real assets, which can include infrastructure,” said David Rogers, founder of Caledon Capital Management, a firm which formulates infrastructure and private equity programs for institutions. “Infrastructure assets can generate average yields between 4-6% long-term, depending on the asset.”

INVESTMENT STRIPES

For investors, certain projects, such as toll roads and bridges may generate steady long-term cash flows, which can assist with liability-driven investing strategies and provide duration hedges. For example, in 2013, a team led by Kiewit and Macquarie Group won a mandate from the Port Authority of N.Y. and N.J. to finance, design and build a $1.5 billion replacement of the 85-year-old Goethals Bridge. The financing comprised various funding sources (equity, private activity bonds and a Transportation and Infrastructure Finance and Innovation Act (TIFIA) loan). The Port Authority will repay the consortium over 40 years, with annual payments starting at about $60 million.

“One of the primary reasons why

Global Pension Funds’ Appetite For U.S. Infrastructure Piquing

David Rogers

3.50%

4.50%

5.50%

6.50%

7.50%

8.50%

Series

Discount Curve

Source: Prequin

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| FALL 2014

people are investing in infrastructure assets is because these assets are operating in monopoly-like conditions, they are providing essential services to the functioning of the economy, so therefore the cash flows tend to be very resilient, even in times of economic or broader financial market distress,” said Darren Spencer, director and client portfolio manager at Russell Investments. “You’re investing in long-duration assets where the leases or concessions are typically 30-99 years, and that is clearly a differentiating feature

relative to other assets in the portfolio.”Some infrastructure investments have

their cash flows linked to inflation. These returns will be correlated to real economic growth and should produce stable returns. Tolls related to the Indiana Toll Road (ITR), for instance, are based on the greater of CPI, the increase in GDP per capita or 2%. ITR is operated by units of Ferrovial and Macquarie Group, which were granted a 75-year lease in 2006.

For larger funds that have the economies of scale to invest directly into projects, such investments may face

relatively little competition, making them more compelling. “When [the Ontario Municipal Employees Retirement System (OMERS)] and [the Ontario Teachers’ Pension Plan (OTPP)] started out, there was less competition,” said Caledon’s Rogers, who was a senior v.p. and team leader of OMERS’ private equity team from 2001-2006. “A lot of the sovereign wealth funds weren’t ready then to invest in infrastructure. Initially, the large Canadian funds targeted 12-14% returns on larger assets. Now you will often find returns around 10% being attractive in markets like Australia, Western Europe and North America, because of the competition.”

IT’S THE ECONOMY…

The poor state of America’s infrastructure is costing the nation billions of dollars. As the population grows, the need to repair the nation’s bridges and highways will only increase. Any boost in private investment in infrastructure should stimulate the economy, including the creation of jobs. Infrastructure jobs account for about 11% of the nation’s workforce, according to A New Economic Vision for America’s Infrastructure, a report published in May by the Brookings Institution and KKR. According to the report, “the United States should spend at least an additional $150 billion a year on infrastructure through 2020 to meet its needs. This investment is expected to add about 1.5 percent to annual GDP and create at least 1.8 million jobs.” An improved economy could also prompt the Federal Reserve Bank to raise rates, reducing measured liabilities.

Pension funds internationally, particularly in Australia and Canada, have been investing in infrastructure for decades. Canada’s OMERS and Australia’s AustralianSuper both reported investments in unlisted infrastructure of more than 10% of

Geoffrey Yarema

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2007 2008 2009 2010 2011 2012 2013 2014 YTD

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Fig. 2: Number and Aggregate Value of Infrastructure Deals Completed by Institutional/Trade Investors

Investors Globally, 2007 - 2014 YTD

No. of Deals Reported Aggregate Deal Value ($bn)

Estimated Aggregate Deal Value ($bn)

6.9% 6.5%

3.4% 2.9% 2.9% 3.0%

2.2%

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Pension Funds

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Allo

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astr

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re (%

of A

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)

Fig. 1: Average Current and Target Allocations to Infrastructure by Investor Type

Current Allocation to Infrastructure

Target Allocation to Infrastructure

Source: Prequin

Source: Prequin

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FALL 2014 |

plan assets. OMERS’ 2013 annual report reflected a 12.4% return from infrastructure assets, exceeding the

benchmark return of 9%.

PUBLIC-PRIVATE PARTNERSHIPS

This level of success can partly be attributed to having a well-defined regulatory framework for investments in public infrastructure. Both Australia and Canada have mature Public-Private-Partnership (PPP) markets. PPPs enable private enterprises to invest in public assets through an infrastructure fund and/or directly in a project. PPPs are a risk-transfer mechanism, where the risk of designing, building, operating and financing projects, for example, is transferred to the private sector. Generally, the private sector realizes a return when the assets perform according to contractual obligations and the project is available for use.

“If you optimize a variety of variables, academic analyses and government audits suggest somewhere between

20-35% in cost savings can be captured over the life cycle of a [PPP] project,” asserted Geoffrey Yarema, a partner at Nossaman LLP, a Los Angeles-based law firm that advises public agencies on delivering mega-infrastructure. “That’s equivalent to, and better than, raising 20-35% in additional funding.”

PPP is a financing not a funding tool. Ultimately, investors expect a return on their investments. “There is a huge difference between funding and finance,” Yarema said. “We have a desperate need for funding, but pension funds aren’t providing that. They want to invest debt and equity that will be repaid from a source of funding.” When comparing funds with AUM of more than $10 billion, only 25% of U.S. plans directly invest in infrastructure, versus 76% of Canadian

plans, according to recent Preqin data.PPP legislation in the United States

is still in its nascent stages. While 33 states have passed PPP transportation related legislation, most bills expire in a few years. Further, the scope of PPP mandates needs to extend beyond transportation-related projects. Going forward, tapping the bond market may be challenging and expensive, as some government entities face budget constraints, weaker credit ratings and debt

ceilings. Similarly, raising taxes may not be politically viable, prompting officials to search for alternative means of financing. “[Pension funds] can inject private equity into P3 projects, taking risk the municipal bond markets are unwilling to take and as a result advancing more funds for construction out of a given revenue stream,” Yarema said. “When combined with lifecycle cost efficiencies, that’s a major part of the value proposition in this country for P3s.”

BENCHMARKS, DEFINITIONS, CLASSIFICATIONS

There is little data on overall performance, making it difficult to benchmark infrastructure investments. “There really is no consistent or appropriate approach

41%

28%

11%

8%

7% 5%

Fig. 3: Breakdown of Direct Infrastructure Deals Completed by Institutional/Trade Investors

Globally by Region, 2012 - 2014 YTD

Europe

North America

Asia

Latin America

Australasia

Other

38%

18%

16%

14%

11% 3%

Fig. 4: Breakdown of Direct Infrastructure Deals Completed by Institutional/Trade Investors

Globally by Industry, 2012 - 2014 YTD

Renewable Energy

Utilities

Transport

Energy

Social

Other

Source: Prequin

If you optimize a variety of variables, academic analyses and government audits suggest somewhere between 20-35% in cost savings can be captured over the life cycle of a [PPP] project,” asserted Geo!rey Yarema, a partner at Nossaman LLP, a Los Angeles-based law "rm that advises public agencies on delivering mega-infrastructure. “#at’s equivalent to, and better than, raising 20-35% in additional funding.

(continued on page 30)

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Amrita Sareen-Tak is a consultant at JCRA Financial, a financial risk management firm. Prior to joining JCRA, she spent 11-plus years at HSBC, primarily within the bank’s capital markets group.

to benchmarking that can be used by all investors across the Infrastructure asset class, as it is such a nascent asset class compared to private equity or real estate,” said Liz Jamieson, a senior associate at Caledon. “The diversity in the benchmarking approaches is partially a product of varying risk/return expectations across institutions, but the most common approach is probably an inflation-linked benchmark.” OTPP, for example, benchmarks infrastructure performance based on local CPI + 4% + country risk premium, according to its 2013 annual report.

Investors interested in investing in U.S. public sector assets face other challenges. The standardization of definitions and classifications is at best murky. There is no central authority to facilitate information regarding funding needs. And the potential negative publicity associated with “public investments” may deter funds from making a commitment (i.e. Alaska’s emblematic “Bridge to Nowhere”).

Given these challenges, most funds have focused on international assets. Chris Taylor, executive director of the West Coast Infrastructure Exchange (WCX), noted the irony of public funds being spent to strengthen economies overseas. Ideally, fiduciary managers would invest domestically, hitting their risk/return targets while creating jobs and strengthening their own economy, added Taylor added. The WCX is a partnership between California, Oregon, Washington and British Columbia to “develop innovative new methods to finance and facilitate development of the infrastructure needed to improve the region’s economic competitiveness.” according to its

website. But select pension funds

are realizing the benefits of investing in public works. Firm such as Caledon have been mandated by small/mid-sized pension funds to advise and develop infrastructure programs.

“[Caledon] looks to help groups on a separate account basis to access funds and co-investments that they may not otherwise be able to and emphasizes that the direct investment model is no longer reserved solely for the larger or mega groups,” Jamieson said.

At times, Caledon may group clients together to access direct investments where the client otherwise may not have the resources or capital to invest on a stand-alone basis. “On a recent opportunity in Australia, we represented several of our clients in pursuing a large asset that the clients could not pursue on their own,” said Rogers. “Either they

could not write a big enough check or they didn’t have the internal team, so we enabled that opportunity by performing the due diligence.”

U.S. state and local governments are also considering the benefits of alternative financing sources, as

traditional funding channels may not meet future needs. These needs will likely drive changes to the regulatory framework and increase PPP adoption. Created in 2012, the formation of the WCX reflects a proactive approach to encourage private sector involvement in public works. “Oregon’s infrastructure challenges are immense, and solving them demands innovative solutions,” said Ted Wheeler, Oregon’s state treasurer. “To build critical projects, we need new models that tap into the expertise of the private sector, while also protecting tax dollars and preserving public ownership.”

The WCX is considering pooling

investments in order to make opportunities more attractive for investors. “Mega projects like the traditional international P3s that are half a billion and up are the minority of the projects that we need to build,” said WCX’s Taylor. “We need to figure out a way to address the smaller projects, and that goes to reducing transaction costs and bundling projects.” The WCX has a number of projects in the pipeline including the Multnomah County Courthouse and a water storage project, which involves both Oregon and Washington. At the Clinton Global Initiative this past June, Maryland Gov. Martin O’Malley announced his intention to pursue the Mid-Atlantic Infrastructure Exchange, to address infrastructure needs in the National Capital Region and the Mid-Atlantic. The idea of the exchange seems to mirror the WCX as a central point connecting government bodies with the private sector to tackle regional infrastructure demands.

Given local governments may have access to lower costs of funding, Taylor encouraged investors to consider investment vehicles that are competitive and provide more direct exposure to U.S. infrastructure. “Look at models where you can invest directly, invest for the long term or band together with other like-minded investors to lower transaction costs. I think it is more long-term, direct investing that gets you there.”

Authorities have slowly made progress in encouraging private investment in infrastructure. Undoubtedly, a stronger infrastructure will fuel efficiencies within the economy, create opportunities and stimulate growth. State and local officials, however, need to do much more to foster the relationship between pension funds and infrastructure investment. The truth, though, is that until pension funds are more incentivized to actively invest in rebuilding America, the two may flirt and flirt but rarely will they spend more time together.

Chris Taylor

Liz Jamieson

(continued from page 28)

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SPOTLIGHT ON: Latin America

Not since the passage of the North American Free Trade Agreement (NAFTA) in the early 1990s has there been so much buzz regarding Mexico and its potential rise as an economic force in the global markets. Since the election of President Enrique Peña Nieto in late 2012, there have been 10 major structural reforms passed by the government, compared to five in the previous 20 years. "e new policies span various sectors, including telecommunications, education and finance. And some of the reforms, particularly the latest energy reform that passed in August, seek to encourage foreign and private investment into Mexico in the coming years.

A key highlight of the energy reform includes the elimination of monopolistic conditions for state-owned Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (FTE), the state-owned electric utility. For the first time in 76 years, private companies will be allowed to participate in the oil and gas sectors, including the extraction, exploration and production of oil. Within the power sector, private investors will now be able to partake in the generation and sale of power. 

Mexico is the the fourth-largest economy in the Americas. According International Business Times, the nation just replaced Brazil as the top choice of investors looking to enter Latin American markets, thanks to steady economic growth, falling labor costs and recent reforms in the financial and banking sectors. "e International Monetary Fund forecasts Mexico’s growth at 2.4% for 2014 and 3.5% for next year (it grew by 1.1% in 2013); Brazil, by contrast, is expected to expand by 0.3% this year and 0.6% for in 2015.

According to Boston Consulting Group’s (BCG) April 2014 report titled !e Promise of Mexico’s Energy Reforms, Mexico’s untapped natural resources, including oil reserves and shale deposits, is an appealing market for exploration and production. "e government’s reforms are expected to increase Mexico’s oil production by 40% by 2025. Further, the government is also targeting Mexican companies to meet 35% of their energy needs from non-fossil fuels by 2024.

PRIVATE INVESTMENTS"e implementation of a regulatory regime more favorable

to private investments, coupled with an underdeveloped infrastructure and Mexico’s untapped natural resources represents a unique opportunity for investors, several observers believe. “"e energy reforms seek to create a regulatory and legal environment more conducive to foreign direct investment,” BCG’s report states. “Although commercial and economic impacts may not be fully evident until 2016, these reforms will grant a first-mover advantage to those who can mobilize quickly.” In 2013, Mexico saw a record of $35 billion in foreign direct investments, a 178% increase from 2012. "e Mexican government expects foreign direct investments of around $350 billion over the next five years to reinvigorate energy production, according to EY ’s 2014 report, titled “Mexico’s Emerging Infrastructure Opportunity.”

“With the energy reform, there will be multiple opportunities opening up in the years to come as the specific contract characteristics for private and international participants become clear,” asserted Alejandro Rodriguez, a director at New York-based PineBridge Investments. PineBridge is global asset manager with $70 billion-plus in assets under management. “Within the energy and infrastructure space, we look for equity-like returns from managers,” Rodriguez added. “Generally, our return expectation on energy

infrastructure investments ranges from 18% to 25%.”

Given infrastructure investment opportunities elsewhere, returns need to be competitive, noted Joe Amador, a managing director at Houston-based energy investment and merchant bank, Tudor Pickering Holt & Co. (TPHCO).

“Investors have a limited pool of funds and, in general, are trying to maximize their risk-weighted returns. For global investors, projects in Mexico will be competing against options to invest in the U.S. or in other countries,” Amador said. “As such, they will be looking for returns in Mexico commensurate with the perceived risks. Historically, energy-

Capital Call Will Mexico’s Latest Structural Reforms Lure Foreign Energy Investors?

Joe Amador

Alejandro Rodriguez

20 NORTH AMERICA

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focused private equity firms have targeted portfolio rates of return in the 20-30% range.”

RISKS TO CONSIDERMounting civil unrest and corruption concerns could slow the flow of investment expected to flow into Mexico’s newly open energy sector if not contained, analysts said. According to a recent report in the International Business Times, oil-and-gas companies and private investors are watching to see if protests and police crackdowns escalate further, and if allegations of government graft continue to emerge. “Corruption and safety are the two most common concerns we hear. Personal safety is a concern, particularly along the U.S. border, and investors are going to have to get comfortable that the Mexican government is taking steps to resolve this issue,” Amador added.

Rodriquez pointed to the very application and implementation of the reforms as among the risks to be considered. “Transparency, certainty of the rules and strong corporate governance will foster better and larger investments,” he said.

CHANGING INVESTOR PERCEPTIONS Two years ago, the rhetoric of yet another politician calling for change may have largely been ignored by investors. !e principal founders of Mexico-based private equity firm Ictineo Infrastructure envisioned the potential impact of a new presidential regime, however, and rolled up their sleeves and got to work on exploring strategic opportunities. “We identified that the market will be going through changes; politically, there were going to be elections and reforms coming with the new government,” said Robert Monturiol, a founding partner at Ictineo. “We realized that there were not many Mexican private equity firms specializing in sustainable infrastructure and given the global trend towards [investing in] sustainability, we saw the opportunity.” !e fund will primarily invest in renewable energy, water treatment, waste management and oil and gas, with the expectation to generate annual returns of 20-30%.

Seventy percent of Ictineo’s capital will likely stem from international investors, according to Bernardo Duarte, a partner at Ictineo. “Given that the energy reform was passed in August, we have seen an increase in interest by foreign investors regarding our fund...foreign interest [has come] from a variety of investors, including: pension funds, asset managers, fund of funds, endowments, family offices from mainly the U.S. and Canada but we have also seen interest from investors based in Europe and the Emirates,” Duarte said. While the Ictineo team would not comment on how much capital has been raised thus far, or name those investors, the team expects to reach their target of $400 million within the next year.

!e establishment of Mexico-based private equity firms will likely be a trend in the coming years, according to Peter

Brown, a managing director in UBS’ Private Funds Group. “!ere are relatively few established private equity firms in Mexico focused on Mexico that are accessing foreign capital. A lot of investors have a view that local expertise, relationships and connections are things that are important, particularly from the perspective of sourcing investment opportunities,” he said. Brown emphasizes that some investors will weigh the prospect of investing in locally managed funds focused solely on Mexico, against investing in funds that have greater flexibility regarding investment opportunities. “A focus, to a certain extent is local knowledge versus diversification” he added.

Canadian-based Brookfield Asset Management, recently opened an office in Mexico City and is reviewing possible local infrastructure investments. !e fund manager began investing in Latin American infrastructure more than a century ago and has dedicated infrastructure funds that invest in countries such as Peru and Colombia. Brookfield currently has approximately $200 billion in assets under management. “Brookfield invests in infrastructure as part of a strategy aimed at earning 12-15% returns over the long term from owning and operating ‘real assets,’ which include infrastructure, renewable power, property and private equity,” said Andrew Willis, a firm spokesman. 

ECONOMIC PROSPECTS!e sweeping reforms enacted across sectors could have a positive impact on Mexico’s infrastructure and overall economy.  For example, the country’s fiscal reform is intended to boost tax revenues by 2.5% of GDP by 2018, which could then fund other areas such as education and infrastructure. “All these reforms will create more jobs and increase the purchasing power of our people, strengthen the domestic market and enhance economic growth” according to a speech by President Nieto in August 2014. !e government expects to generate 500,000 jobs within the energy sector alone.

Earlier this year, Moody’s upgraded Mexico to single A, making it one of two Latin American countries to be rated at that level—the other country is Chile. !e upgrade was driven by the structural reforms approved last year, which Moody’s expects will strengthen the country’s potential growth and fiscal fundamentals, per the agency’s report.

!e World Economic Forum’s Global Competitiveness Report 2013-2014 ranks Mexico 66th out of 148 countries regarding the quality of its infrastructure. !e Mexican government sees the need for change and market participants see hope in their promise. As for the founders of Ictineo, they are bullish on Mexico’s growth potential and feel the momentum increasing. “We are Mexican and 100% focused only on Mexico; we see the opportunities, we understand the market, we target returns of 20% because we know how to implement the right strategies and recognize the impact of change.” Monturiol asserted.

—Amrita Sareen-Tak

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Fiduciary management was a nascent concept five years ago. Then, only a few early adopters employed the strategy, according to Richard Dowell, head of clients at Cardano, a U.K. investment advisory firm. “Those [early adopters], at least from the perspective of Cardano clients, have done very well. Funding ratios have grown over the period, whereas the average U.K. scheme will likely have seen deterioration.”

According to iiSEARCHES, 129 fiduciary mandates were awarded to various advisors and consultants over the last four years, versus 112 mandates for the prior four-year period. The increase in fiduciary mandates is driven by the idea that having a greater focus on all facets of a fund versus focusing solely or primarily on traditional asset management services will generate better performance overall. “It is important to have the right people across the fields of investment management, risk management, operations, legal, actuarial and also those who understand the back drop in which trustees have to operate,” Dowell added.

iiSEARCHES’ data reflects a very broad definition of fiduciary mandates. Mandates in this category have ranged from monitoring and implementing de-risking strategies to mandates related to the operational management of assets. While fiduciary management may have different implications across firms, the industry’s general perception links fiduciary mandates to LDI-related strategies. Firms such as SEI, however, think that fiduciary management offers a wider range of services beyond LDI. A recent post on SEI’s web site states: “Fiduciary management does not equal liability-driven investing.” SEI’s U.K. Business Development and Managing Director Ian Love believes that while LDI is a key component of fiduciary management, healthier funds with strong covenants do not necessarily need to focus solely on LDI strategies. Funds with stronger funding ratios will likely have some leverage to focus on growth and possibly take more investment risk. “It is not always about locking down the interest rate and inflation risk,” Love said.

Trustees are beginning to realize that the traditional model of managing a scheme and picking a manager for a 10- to 15-year horizon is not always the best solution. Pension schemes can be sensitive to more short-term issues and certain techniques,

Fiduciary Management Growth Transforms European Pension MarketBy Amrita Sareen-Tak

such as dynamic asset allocation overlays and hiring specialist managers, can help improve growth, Love noted.

Pirelli’s pension fund has employed Cardano as a fiduciary manager since mid-2011. According to Pirelli’s Pension Manager Tony Goddard, the fund started exploring fiduciary managers when the scheme realized the traditional consulting model was dated and that most trustees did not necessarily have the time to build deep expertise in investment matters. “We had a period before my involvement when somebody said ‘you should be looking at swaps rather than gilts.’ Then the trustee took legal advice and then actuarial advice…by the time they got themselves in a position to where they were happy to do something, the market had moved away and they weren’t in a position to take advantage of the idea.” So that, combined with the dislike of the standard consulting

model, meant that the trustees and the company were keen to move towards a fiduciary mandate, he explained.

Goddard noted that while Pirelli was searching for its fiduciary manager, the scheme ran training courses in parallel for trustees so they could increase their investment knowledge in general and fiduciary management in particular. The

As increased regulation and governance continue to impact global financial markets, the number of fiduciary mandates—in which a third-party provides front- and back-office services—awarded by European pension funds has grown significantly. Trustees, particularly in the U.K. and Netherlands, appear to be taking greater ownership and a more hands-on approach to managing their funds. There is a greater awareness by trustees of the importance of ensuring there are dedicated professionals to advise on multiple aspects of a fund, representing a shift from the traditional governance model that offers a number of benefits, according to some industry practitioners, including more time for the trustees to focus on areas that cannot be delegated and better control over schemes in the pursuit of stronger funding ratios.

It is not always about locking down the interest rate and in!ation risk.

—Ian Love, SEI

(continued on page 16)

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fiduciary manager selection process took Pirelli approximately one year, with the company appointing consultant KPMG to help pick a manager.

CONSULTANTS COMPETE WITH ASSET MANAGERS

While a majority of fiduciary mandates have been awarded to consultants, asset management firms are also growing their

presence in the fiduciary management space. According to KPMG’s 2013 Fiduciary Management U.K. Market Survey released last November, 75% of the fully delegated fiduciary market is managed by consultancies, though this represents an approximate 5% reduction from a year ago. Consultancies have dominated the fiduciary management space, largely due to their deep relationships with asset owners, which allow them to cross-sell to a scheme. As such, there is a perception in the industry that there is an increasingly fine line between offering consulting and advisory services to the same fund. Having a single firm provide multiple services may limit a diversified investment approach and may inadvertently create biases in terms of that approach.

According to Dowell, “there is definitely a conflict of interest if you are currently an advisor, and then advise your client to move to fiduciary [services] without undertaking an open market search.” Fee arrangements vary between funds and managers. Not surprisingly, many arrangements include some type of flat payment and then a larger fee tied to performance. This arrangement is reflective of Pirelli’s current agreement with Cardano. “If the advisor is not comfortable with performance related fees, then how could the trustee get comfortable with what the advisors claim they can deliver?” Goddard asked.

SIZE DOESN’T MATTER

KPMG’s 2013 Fiduciary Management U.K. Market Survey also emphasizes that the U.K. fiduciary market continues to grow at more than 20% per annum. Interestingly, the survey noted that fiduciary management solutions are more common for smaller pension schemes than larger ones in the defined benefit space, with 91% of mandates being smaller than

GBP250 million (approximately USD415 million) in terms of assets under management. Arguably, smaller sized funds have limited resources and would have a greater need for a fiduciary manager. Firms such as Cardano have seen increasing interest by medium- and larger-sized schemes. “The concept of accessing a full-time professional team managing assets against liabilities looking to achieve better results applies equally well to all types of schemes—size shouldn’t be an issue,” Dowell

asserted.iiSEARCHES indicates that roughly

70% of the European fiduciary market stems from mandates by U.K. and Dutch pension funds. In particular, pension funds based in the Netherlands have been active users of fiduciary managers for more than 10 years. Other anecdotal evidence suggests that approximately 85% of the fiduciary management market in Europe is dominated solely by the Dutch. “Since originating in the Netherlands in the early 2000s, fiduciary

management has transformed the Dutch pensions market,” said Christy Jesudasan, senior client director at MN. He noted that this transformation is attributable to the benefits fiduciary management offers, including: allowing trustees to focus on the setting of strategic investment policy and strategic important decisions; enabling small- and mid-sized schemes to share in economies of scale, sophistication and diversification that would normally only be available to larger schemes and ultimately, helping pension funds to tackle their funding gap and meet long-term funding goals. “U.K. pension funds face similar issues to Dutch schemes and given that fiduciary management can provide the resources, investment expertise and scale they are after, fiduciary management is now gaining traction in the U.K. market too,” he added.

It may be no coincidence that between 2001-2012 Dutch private pension fund assets to GDP ratio grew about 56%—the most than any other country, according to the Organisation for Economic Co-Operation and Development’s (OECD) Web site. “We believe that fiduciary management is fast becoming the governance model of choice for U.K. pension trustees. We expect the strong growth in fiduciary management to continue—indeed we would expect the majority of corporate defined benefit pension schemes in the U.K. to adopt a fiduciary management model over the course of the next five to 10 years. More and more trustees are seeing how a nimble decision-making framework can lead to increased control over pension scheme funding levels,” Love concluded.

Amrita Sareen-Tak is a consultant at JCRA Financial, a financial risk management firm. Prior to joining JCRA, she spent 11 years-plus at HSBC, primarily within the bank’s capital markets group.

If the advisor is not comfortable with performance related fees, then how could the trustee get comfortable with what the advisors claim they can deliver?

—Tony Goddard, Pirelli

(continued from page 14)