It is 10 years since the consultant started recommending the use of such mandates. It suggested that clients avoid sacking switching fund managers unless the news was truly bad, such as mass defections of key staff. According to Towers Watson head of research Craig Baker, clients who adopt a long-term approach have been changing managers at a third of the industry rate of 20 per cent a year.Towers Watson also recommended the retention of managers who do not trade frequently. According to Baker, long-term managers have been turning over a fifth of their portfolios a year, against the usual 100 per cent.
The consultant put together a model for its long-term returns stretching back nearly nine years for investors who followed these two policies. Annualised returns of 7.5% a year beat the MSCI All Country index by 2.5 percentage points a year. The mandates would have beaten traditional returns by well in excess of three.
Baker confirmed that the relatively small number of long-term mandates put in place 10 years ago have beaten the indices by a similar margin. They have exceeded their benchmark return of CPI inflation, plus 5 per cent. Baker says: “We’ve found the results encouraging, and a number of our clients have started to use it. We advise £10 billion, managed on this basis.”
Towers Watson’s initiative pre-dated the UK government-sponsored Kay review, which said investors should take a longer term view of investment. The Kay review also recommended that the fiduciary responsibilities of fund advisers should be reviewed by the Law Commission. It is seeking views on whether the role of advisers, including consultants, should be clarified. It is also deliberating whether trustees should allow ethics to play more of a role in investment decisions.
European internal markets commissioner Michel Barnier has voiced support for long-term investment decisions. The Japanese economic and industrial policy bureau has been taking soundings on whether its market participants should take a longer term approach.
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Full Towers Watson Report: Pension Finance Watch — December 2013
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