Dutch in fray for U.K. fiduciary business

Mn Services executives are hoping some of the luster from their Dutch fiduciary management expertise will spread to the U.K. — Europe’s largest pension market.

The firm is the latest on a growing list of managers and consultants trying to make a push into fiduciary management in the U.K., including Goldman Sachs Asset Management, BlackRock Inc., and Mercer LLC, all based in New York. Cardano Group, Rotterdam, Netherlands, is also making similar offerings to British pension funds.

Such strategic partnerships provide one-stop shopping for pension executives seeking to outsource the management of either the total pension fund or a portion, such as alternative investments. These arrangements have been picking up steam in the U.S. as well (Pensions & Investments, May 12).

Officials at Rijswijk, Netherlands-based Mn are searching for a merger or partnership in Britain and are planning to open a London office by the end of the year. The firm has about €65 billion ($102 billion) in mostly Dutch assets under management, and officials there are looking overseas for growth.

The United Kingdom had about 7,800 corporate defined benefit plans with aggregate assets valued at £821 billion ($1.6 trillion) at the end of April, according to estimates by the London-based Pension Protection Fund, Britain’s equivalent of the Pension Benefit Guaranty Corp. As additional regulatory requirements and increased complexity in investment portfolios make investment decisions more complex and costly, more fund executives are likely to outsource these duties, fiduciary management providers said.

“Our strong point is the construction of the right portfolio and reducing risk while generating higher performance,” Rudolf Hagendijk, chief executive officer of Mn Services, said in an interview. “This is a proposition we believe could be attractive in the U.K.”

Mr. Hagendijk said he’s confident the firm will win its first U.K. fiduciary management mandate next year. “We have to make sure that we’re not simply copying the Dutch model for the U.K. market,” he said, “but there’s certainly expertise that is transferable.”

Mn officials are hoping competitive pricing, investment expertise that’s specifically tailored to pension funds and access to more innovative strategies such as life settlements will attract U.K. clients. Mn was among the first in the Netherlands to allocate to innovative strategies such as hedge funds, commodities and timber. “We are now taking small steps to win the trust of (U.K.) pension funds,” Mr. Hagendijk said, adding that closed defined benefit funds are among those targeted.

Mn officials aren’t relying on consultants for asset gathering in the same way that traditional asset managers operating in the U.K. are, according to one London-based pension expert who asked not to be named. As a result, Mn might be in a better position to compete aggressively without worrying that it might affect its ability to win other types of investment mandates.

Fiduciary management was first introduced in the U.S., where it is known as outsourcing or strategic partnerships, but it’s been in the Netherlands where the practice has flourished over the past several years, consultants and managers said. Third-party fiduciary assets under management in the Netherlands are estimated to be about €300 billion, according to data from Avida International BV, an Amsterdam-based independent consultant specializing in fiduciary management.

The term generally means a combination of a manager-of-managers service with asset-liability modeling, portfolio construction, risk management and consolidated reporting in an all-in-one model. In many cases, fees are paid on a management and performance basis.

While the aim is to manage an entire pension fund, providers also take on more specialist portfolios, such as a fund’s alternatives strategy. Some, including Goldman Sachs Asset Management, use mostly external managers to implement the investment strategies. Others, such as BlackRock, tend to run the majority of the assets internally.

Consultants also compete in this field. In the U.K., where pension fund executives have traditionally relied on external advisers in making investment decisions, consultants might have an edge over asset managers, according to some industry experts and fund sponsors.

“If you’re an asset manager (offering fiduciary management services), why should a competing manager give you access to capacity, lower fees or the latest innovations in asset management?” said Rich Nuzum of New York, who earlier this month was promoted to president and global head of investment management business at Mercer.

Mercer, for example, formally launched its “implemented consulting” platform in the U.K. and Ireland last year and now has about a dozen clients ranging from funds with total assets of a few hundred million pounds to those with more than £10 billion.

More clients at Watson Wyatt Worldwide are also choosing to outsource their investment responsibilities. “We take care of all the investment operations similar to the way a fiduciary manager can fulfill that role, except we don’t actually implement the decisions,” said Paul Trickett, European head of investment consulting based in Leeds, England.

Watson Wyatt has 30 U.K. clients in its advanced investment solution program, with fund sizes ranging from about £150 million to several billion pounds.

“The key to fiduciary management is a focus on liability,” said Andre du Plessis, Goldman Sachs’ global co-head of fiduciary management based in London. “Given the volatility of the markets, and the regulatory and accounting changes we’ve seen in the U.K., there’s a strong need for this type of product here.”

Several pension funds have recently approached GSAM about fiduciary management, and executives are considering offering the product “selectively” in the U.K., Mr. du Plessis said.

“It is not intended to be a strong push,” he added. “Fiduciary management is extremely resource intensive, and it’s critical that any growth in the business is thoughtfully and carefully managed. Therefore, our ability to take on new clients is reasonably restricted.”

Globally, the firm has about $28 billion in fiduciary assets under management, split about evenly between continental Europe and the U.S.

U.K. pension fund executives seem more willing to outsource a portion — rather than all — of the fund, managers and consultants said. For example, alternatives or specialist alpha portfolios are increasingly being outsourced in what has been dubbed ‘partial fiduciary management.’ Liability-driven investing bond and opportunistic investment strategies are other approaches that could be outsourced in the coming years.

Andrew Dyson, BlackRock’s managing director and head of European institutional business based in London, said the firm won its first U.K. fiduciary management mandate in July 2007. The £1.2 billion Cumbria County Council Local Government Pension Scheme, Carlisle, England, hired the firm to run a £120 million multiasset alternatives portfolio. BlackRock advises on investment strategy and manager selection and is accountable for the overall performance. Since then, two other pension funds have made similar appointments. Mr. Dyson declined to specify which funds.

Globally BlackRock had $35 billion in fiduciary assets under management at year-end 2007.

“There’s a lot of interest in partial fiduciary management” in the U.K., Mr. Dyson said. “We’ve had good responses and we anticipate continuing growth … but it’s still in its early stages. I don’t think the market is fully developed in the U.K. yet.”

Added Mercer’s Mr. Nuzum: “I expect strong growth from a reasonable base, “but it’s not as though the majority of the market is going to be outsourced overnight.”

Contact Thao Hua at [email protected]