(March-2004) Perform or perish: get those mandates

Life is getting more challenging for Australia’s asset consultants with 24 months of negative returns making clients more wary and discerning.

And while the number of companies working in the asset consulting arena has not changed dramatically, only those with the runs on the board are picking up the important new mandates.

It is in these circumstances that the managing director of Frontier Investment Consulting, Fiona Trafford-Walker says structural shifts are beginning to occur with firms either staying with the traditional approach or diversifying and moving towards implemented consulting.

Towers Perrin director of Asset Consulting Services, Paul Laband agrees that a change is occurring within the sector and that it is likely to become more marked in circumstances where achieving alpha gets harder.

For its part, Towers Perrin is pursuing a less orthodox and more active approach involving portfolio “tilting” and a greater emphasis on alternative asset classes such as private equity and hedge funds.

However, the traditionalists still seem to be holding sway. Over the past 24 months, JANA has undoubtedly been the asset consultant most in favour with trustees mostly because its early withdrawal from international equities saw it generate better than average returns.

JANA general manager Ken Marshman acknowledges that the company’s performance on behalf of its clients over the past 12 to 18 months has generated a strong level of interest and new mandates, but argues that this isn’t particularly inconsistent with the company’s performance over the past 13 years.

Marshman says the number of mandates won by JANA over the past 18 months probably can’t be sustained and that, in any case, JANA wouldn’t be looking to do so in circumstances where it is seeking to provide high quality service to its clientele.

“The issue for asset consultants is to provide the best advice they can for the people paying their salaries,” he says.

However, he admits that the gains made by JANA over the past five years have unquestionably strengthened its position by giving it the resources to enhance its research capabilities and therefore its ability to provide quality advice.

Laband says that in the current environment there is a need for consultants to manage more dynamically and this is one of the reasons why Towers Perrin has adopted its tilting strategy — both intra-asset class and inter-asset class.

He says examples of this approach were in June last year when Towers Perrin was recommending a shift from fixed interest to cash and from emerging markets to international equities.

Looking at alternative investments, Laband says that in the high volatility low return environment, Towers Perrin have encouraged clients to increase their exposure to private equity and hedge funds.

InTech Financial Services chief executive, Brett Elvish says with 20/20 hindsight, the tough times experienced over the past two years can be seen to have been a positive experience for asset consultants because it has clarified clients’ risk tolerance.

“One of the hardest things to gauge in asset consulting is a client’s risk tolerance and, in circumstances where those clients have faced a good deal of adversity, their capacity to accommodate risk has become clearer,” he says.

However, while acknowledging that the recent tough times may have made clients more willing to embark on new strategies, he cautions against people pursuing “fads”.

“Sitting on your hands isn’t the thing to do,” he says. “You need to experiment a bit and make the risk decisions.”

However Elvish says that more depends on selecting the right managers than dramatically altering underlying asset allocations.

He acknowledges that over the past nine months there has been an unusual amount of movement in terms of super funds changing asset consultants and says this is hardly surprising in tough times.

“If people were going to change, we have just been through the period when it would have occurred,” he says.