LONDON - Money managers with U.K. clients are in trouble.
There is now one year to go before the U.K. government writes its report card on how well the U.K. pensions industry has complied with best practice principles outlined in former Gartmore Chairman Paul Myners' review of institutional investment in the United Kingdom.
Mr. Myners thinks money managers might fail the government's test, as they have not yet done enough voluntarily to improve their record keeping and corporate activism.
He warned the money management industry that it would not make the grade "if in one year's time there is no real evidence of a real decline in the use of soft commissions, no evidence of fund managers making clear statements on their commission policy and no evidence that the cosy relationship is being split up between the buy side and sell side," he said at a press conference at the National Association of Pension Fund's Annual Investment Conference in Edinburgh.
The U.K. government has threatened to make compliance with the Myners principles compulsory if managers, trustees and consultants do not comply voluntarily.
Tackling transaction costs
Money managers have begun to tackle the thorny issue of transaction costs. Last month the Investment Management Association and the National Association of Pension Funds, both of London, released a draft disclosure code for reporting on these costs.
The code requires money managers to report all explicit costs to their clients every six months, including direct, soft and recaptured broker costs; fund management and custody fees; foreign exchange costs; bank charges; and taxes. Clients in pooled funds would receive information on similar costs, but for the fund as a whole.
Money managers also will be required to provide an annual report stating companywide policies and procedures for managing client costs.
Managers have until early April to rspond to the draft, which is likely to be implemented starting in early 2003, said Lindsay Tomlinson, IMA chairman. At this stage it is unclear how much it will cost money managers to install reporting systems in line with the draft code. But according to a consultation paper published in February by the Investment Managers Association most of the information is readily available.
The draft does not require managers to report on the costs of managing asset classes such as private equity, commodities and property.
The IMA has no legal authority to impose these reporting requirements. But Ken Ayers, deputy chairman of the NAPF's investment committee, hopes pressure from trustees and competing money managers will encourage firms to adopt the code. "It would be dangerous to reject this code," he warned.
Mr. Myners gave a muted welcome to the draft code, but said it could go further, particularly in giving greater detail on transactions with related parties. His original report suggested managers pay transaction costs and charge clients an all-inclusive fee, but this idea was rejected by the pension plans and money managers as not being workable or sufficiently transparent.
Too much detail
Many plan trustees attending last month's NAPF conference in Edinburgh were concerned the code was too detailed. Some said such detailed disclosure might be difficult for trustees to interpret effectively.
David Gamble, chief executive of British Airways Pension Investment Management Ltd., London, said the code was a good start but needed to be carefully explained so trustees would not sacrifice good performance for lowest transaction costs. He suggested it might be necessary to have independent advisers audit the reports. He also suggested money managers should report performance net of fees, and called on the government to abolish the stamp duty, a tax that pension plans have to pay on all share transactions.
Mr. Myners also said he was concerned that money managers were ducking their responsibilities regarding corporate activism.
He urged trustees to ask their managers how they deal with underperforming companies, adding that underweighting a stock should not be an option. If a money manager did not like a stock or think its prospects were sound, it should not invest in the company at all, he said.
Money managers with U.S. clients already have to comply with U.S. Department of Labor rules on corporate activism, so it would not be onerous for them to apply these standards to U.K. clients as well, he said.
"It's not right for fund managers to wash their hands of their responsibilities to be responsible shareholders," he added.
A test
Mr. Myners said greater diversity and competition is still needed among actuaries and investment consultants. "This will be a measurable test for the government," which likely will use the Herfindahl-Hirschman index - which compares companies' market shares - to measure how concentrated the U.K. consulting industry is, he said. The government expects to see new participants in the consulting industry, he warned.
But Mr. Myners said he was generally satisfied by the progress made by both the government and pension trustees.
He was pleased that private sector pension plans appear to be moving away from peer group benchmarks, but said greater progress was needed in this area among public sector and local government plans.
Trustees, however, still are not spending enough time looking at asset allocation and alternative asset classes such as private equity, and tend to spend too much time on stock selection issues, he said.
NAPF Chairman Peter Thompson said the U.K. pension industry is only about a third of the way through implementing the Myners principles, adding that 18 months was a short time within which to expect the industry to adopt them.
The government published its approved version of the Myners principles in October 2001 and expects voluntary compliance by next March. So far it has refused NAPF requests to grant an extension, he added.
