Over the last 30+ years, pension trustees have added significantly to their investment portfolios:
- introducing additional sources of return by asset type, geography, and investment vehicle, and
- using a wider toolset to manage and control risk
Overall, the results have been positive, but at the price of greater complexity. It has stretched governance resources and operational processes and has increased costs substantially.
One of the key issues arising from these changes has been the increase in the number of parties involved in the overall management of the portfolio.
This approach has been based on a belief that a best-in-class line up of fund managers can deliver consistent alpha over and above a diversified set of betas.
The cost of this model in terms of higher fees has always been a point of debate, with many schemes opting for passive management in more ‘efficient’ markets. This has helped drive down asset management fees in those areas significantly over the years.
But the cost of complexity in terms of the additional governance, liquidity and operational risks have not always been well examined.
The turmoil in gilt markets in September-October 2022 was a stark reminder that complexity introduces risks that can more than offset the performance benefit of a best-in-class strategy. This has profound implications for pension schemes, investment managers, investment consultants and other service providers, as it highlights that de-risking is about more than reducing investment volatility.
In this outsourcing and risk management paper we consider:
- Outsourced investment approaches: A full menu
- The need for resilience: Risk reduced or simply outsourced?
- Considerations for best practice
- The case for partial outsourcing
- Future-proofing is essential, be that under full or partial outsourcing
