LONDON - Track records of money managers bidding for specialist portfolios from British pension funds will come under scrutiny under a new code by the U.K.'s National Association of Pension Funds.
The code, which was unveiled last week, is designed to discourage misleading advertising, encourage money managers to use broadly consistent standards in presenting their track records, and help trustees and pension managers in evaluating data presented to them.
U.K. pension funds have been gradually increasing their use of specialist mandates. Specialist portfolios now account for about 25% of the U.K.'s 550 billion ($847 billion) in pension assets, estimated Peter Warrington, a director at The WM Co.'s London office.
The standards ensure that managers submit all relevant discretionary portfolios to an independent performance measurer. Money managers also must seek approval to exclude accounts and accounts cannot be removed retroactively.
In addition, the code bans carving out geographic or asset class segments from global balanced mandates in compiling composite track records, although such data can be used as supplemental information.
The code relies heavily on independent measurement of performance data. In the United States, by contrast, standards developed by the Association for Investment Management and Research, Charlottesville, Va., permit managers to measure their own performance. The U.S. standards place a greater emphasis on calculation techniques and auditing of composites.
One of the major issues raised by international money managers in comments to a draft the NAPF issued last June, was whether AIMR standards could be used as an alternative to the NAPF code, explained Peter Stanyer, chairman of the NAPF panel.
That suggestion was deferred, as the NAPF, AIMR and representatives from 11 other countries are in the process of developing a global standard.
Mr. Stanyer is stepping down as chairman with the publication of the code. He had become a director of Mercury Asset Management PLC, London, last year, leaving his post as investment director of Railpen Investments, the manager of British Rail pension assets.
Mr. Stanyer will be succeeded as chairman of the monitoring group by Philip Lambert, head of corporate pensions at Unilever PLC, London, and a former chairman of the European Federation for Retirement Provision.
Mr. Stanyer said there was no evidence of widespread lying in the money management industry.
"We don't think there's a problem of fund managers being dishonest. We do think there's an issue of competitive pressures encouraging money managers to present records in the best possible light," he said.
Mr. Stanyer noted the guidelines also include a series of questions for trustees and pension managers to ask of money managers to better understand performance data presented.
But he added the committee was in no way encouraging trustees to proceed with manager selections on their own. The guidelines "are not intended to substitute for investment advice from investment consultants," he said.
The NAPF code includes a healthy list of warnings to trustees.
In particular, the NAPF beefed up its warnings on composites for fixed-income portfolios. These are the fastest-growing type of specialist accounts in Britain, as pension funds are becoming increasingly mature and looking toward the implementation of new minimum funding rules.
The code notes that track records will be influenced by the choice of benchmark, say, between a five-year or 15-year bond index. In addition, credit risk and foreign currency and foreign bond risk also will affect composite track records.
The role of cash in bond portfolios significantly affects their duration, Mr. Stanyer noted. Supplementing composite data with performance on individual accounts might be advisable, according to the code.
In addition, the new code calls for showing any use of derivatives based on their full economic exposure - but without leverage, Mr. Stanyer said. In the case of tactical asset allocation portfolios, it may be helpful to look at individual account data as well, Mr. Stanyer added.
Performance will be measured on a time-weighted basis, and performance for individual years must show weighted averages and median performance.
Dispersion of performance among accounts will be revealed by requiring managers to show performance of the top decile and bottom decile accounts.
Also, the extent to which managers invest outside of their benchmark - say, for an international equity manager with developed-market mandates who dips into emerging markets for an added fillip - would be uncovered by the disclosures.
The code still may pose some obstacles for non-U.K.-based managers seeking to penetrate the U.K. market.
Its call for inclusion in composites of all appropriate portfolios that cover a minimum of three calendar years will be difficult for newer managers to the British market, although managers can use portfolios managed for shorter periods if they are new to the market.
Longer time periods can be provided as well.
Money managers also will be able to turn to consultants or custodians to measure their results, easing one concern for U.S.-based managers.
Still, some may worry whether results not measured by The WM Co. or the Combined Actuarial Performance Services Ltd., the U.K.'s two main performance measurers, will be acceptable to trustees.
But the committee was careful not to give a duopoly to those firms, Mr. Stanyer said.
The thoroughness of the code may cause some practical problems, said Mr. Warrington. "It's just impractical to add that (much) material. I'm not sure it will be used," he said.
"Having said that, (the code is) still a good idea. It's certainly a step in the right direction," Mr. Warrington added.