LONDON - Watson Wyatt Worldwide is taking a softer approach toward picking money managers.
Traditionally, the international benefits consultant relied on "hard" data in evaluating money managers, like past investment performance, firm resources and portfolio characteristics.
But now, said Roger Urwin, head of the firm's European investment practice, the consultant is placing greater emphasis on less tangible - or "softer" - characteristics, such as the quality of a manager's business, its people and its investment process.
"Watson Wyatt has gone soft," Mr. Urwin told participants in the firm's annual U.K. conference for its global asset study project.
This 1990s' "touchy-feely" approach to picking money managers may rile traditionalists, who are used to quantifying all aspects of a manager's makeup. But a more qualitative focus steadily has been gaining adherents, particularly among U.S. pension executives.
The shift toward softer criteria was based on several factors, Mr. Urwin said. Studies by management consultant McKinsey & Co. and others reveal corporate executives at top-performing companies pay far greater attention to softer factors than their competitors do.
What's more, Watson Wyatt has found soft factors seem to make the most difference in manager performance, he said.
The consultant has developed a Future Return Expectation rating system, known as FREX, to attempt to get an idea of future investment performance and to measure manager skill, based on these soft factors.
This focus on softer factors ties into Watson Wyatt's global asset study, which postulates that pension funds throughout the world tend to go through a similar life cycle in search of better investment performance.
Pension funds are driven by a combination of cultural and financial considerations, said Susan Douse, a senior consultant with Watson Wyatt Worldwide. But peer pressure has led to conformity across funds in any given market.
For example, U.K. pension funds have a relatively high level of equity investments, at an average of 82%, while U.S. funds have an average 50% stock allocation, Japanese funds 35% and Dutch funds 28%.
Also, U.S. pension funds heavily favor specialist managers, investing 85% of assets with them, a much greater percentage than other countries. Only 30% of Australian pension assets, 25% of U.K. assets and 15% of Dutch assets are invested with specialist managers.
Other factors, such as accounting pressures, also drive investment objectives.
For example, Japan's system of book valuation accounting causes money managers to hold onto lousy stocks, said Naomi Denning, a consultant in the firm's Hong Kong office. But the Japanese system is starting to change: it is allowing in foreign managers and is moving toward market valuations, she said.
As pension funds evolve, they tend to become more complex and sophisticated, Ms. Douse said. Unfortunately, this growing complexity and conformity have hampered investment performance - in part because the fund's investment process and monitoring procedures have been less well-defined or less efficient, Ms. Douse added.
Ms. Douse urged U.K. pension fund trustees to implement monitoring principles based on realistic performance targets and defined manager hiring and firing criteria. (Realistic performance targets for multiasset accounts is 50 basis points above the median or and 100 basis points for specialist mandates - half of the normal target, according to Mr. Urwin.)
In addition, Ms. Douse said the skill of the manager should be the main factor in picking a manager, while past performance should be relegated to a secondary factor.
Monitoring, she added, should be based on knowing the manager well. In turn, better relationships should motivate managers better because they better understand what their clients want, she added.
Ms. Douse added trustees should take control of the agenda in meetings with managers. In too many cases, the manager the dictates agenda, cowing trustees with complex economic discussions, she said.
Nick Watts, a Watson Wyatt senior consultant, said that evaluating a manager's business, investment staff and process ideally should occupy about 30% of a manager meeting.