LONDON - Consultant William M. Mercer has put its head above the parapet by publishing a performance track record of all its active manager recommendations.
Fortunately for them, the results aren't bad.
Clients have given the report a generally warm response, but say the biggest difficulty in coming to grips with the Mercer report is that there are as yet no other consultant surveys against which to compare it.
Excluding transition costs, money manager and consulting fees, the average annual return over the last seven years from Mercer's manager recommendations across all asset classes it reviews was 2.3 percentage points a year above benchmark.
The firm is one of the first investment consultants to publish a performance record across all the assets classes where it recommends managers. But without a benchmark what is the value of a survey like this?
Nat Duffield, director of trust investments at Halliburton Co., Dallas, said the report was a useful tool in measuring the value of investment recommendations, but added this was just one aspect of the service typically offered by a consultant. The firm uses Mercer as investment consultant to its U.K., U.S. and Canadian pension plans with assets totaling US$5.6 billion.
"Mercer has come up with a reasonable effort to show their capability. The problem is that another consultant may use a different methodology and then we won't know if we are comparing apples with apples. You almost need a consultant to advise on the consultants," he added.
Peter Moon, chief investment officer of the L20 billion ($28.5 billion) Universities Superannuation Scheme Ltd., Liverpool, a Mercer client, welcomed the research review, but with a few caveats.
"It's a first step and other consultants should be encouraged to do the same," he said. But he would prefer the firm to publish performance numbers net of fees and transaction costs. The 2.3 percentage-point return figure was high, he said, and made him somewhat concerned as to where the performance was coming from.
Mr. Moon also was concerned that the research recommendations were based on a very broad range of indexes, some of which might be easier to outperform than others. A more consistent range of benchmark indexes could reduce the risk of cherry-picking when reporting investment returns, he said.
Ian Talbot, head of treasury for the London Borough of Croydon, said the report showed the areas where Mercer's recommendations were most effective. "It does suggest that they know some markets better than others," he added. The firm's best returns came from its manager recommendations in the Asia/Pacific region and for global/international mandates where gross returns were 4.3% and 2.6%, respectively.
Gross returns for Europe and North America were 0.8% and 1.4%, respectively. Bill Muysken, Mercer's global head of manager research, said these markets generally were traded more efficiently and that returns from active managers in these sectors tended to be closer to benchmark indexes as a result.
Broad focus needed
Mr. Talbot said he would like to see other consultants publish similar reports, but was concerned they may focus too closely on their peer group performance record. Mercer consults to the borough's L350 million pension plan.
Investment consultants operating in the United Kingdom are under increasing pressure to demonstrate the value that their services give to clients. The Myners report found trustees made only limited assessment of manager research activities by consultants, and recommended trustees seek formal assessment of their adviser's performance and decision making.
Frank Russell Co., Tacoma, Wash., publishes similar figures to Mercer's, but only for recommendations to its U.S. clients. Its manager recommendations for a weighted model portfolio for U.S. investors yielded a 1.5 percentage-point annual investment return between 1991 and end 2000, according to Scott Donald, director of marketing and product development. The figure includes transaction costs, but not money manager fees, he added.
Mercer's Mr. Muysken estimated for Pensions & Investments that net returns for its manager research recommendations were around 1.3%. Mercer charges its clients on average 10 basis points per year for advice, he said. Average active manager fees were around 50 basis points and, on the basis that a pension plan changes one in five managers every year, transition costs would be around 40 basis points, he added.
Watson Wyatt Worldwide, Reigate, internally tracks a number of model portfolios, but is not likely to publish this data for another few months, said spokesman Russell Smith. Towers Perrin, London, does not produce similar figures and has no immediate plans to do so, said spokeswoman Tamara Cutting.
"Unless consultants can and are willing to demonstrate that they can and do add value there is not much point getting them involved," in giving advice, warned Mr. Moon of the Universities Superannuation Scheme.