Funds with internal teams, good governance earn more – Watson Wyatt study

Preliminary research by Watson Wyatt shows that better fund ‘governance’, where super funds employ their own investment teams and delegate well, can add 2 per cent a year to returns.

The research, conducted in association with Oxford University and to be published next month, looks at the practices and process of 10 of the largest and ‘best’ pension funds in the world. Roger Urwin, global head of investment consulting for Watson Wyatt, presented the preliminary results to the firm’s ‘Ideas Exchange’ conference in Sydney last week. The pension funds in the study each had produced at least 2 per cent a year outperformance over their peers. Common characteristics of these funds included: . They understood risk well . They had a long-term time horizon which gave them an “inner calm” . They prided themselves on their ability to adapt . They had a clear mission . They managed a lot of the investment process out of house . They had “real time” decision making capabilities, necessitating delegation . They exploited their competitive advantages. Urwin said the successful organisations had come to terms with the importance of changing governance. Across the industry, he estimated, the average of internal costs to total fund costs was about 10 per cent. But the funds in the study averaged about 20 per cent. The funds used advanced investment strategies, including a large range of alternative investments, but had the right governance to manage this. The best funds were differentiated by having a highly competent investment committee, supported by a highly competent board and an executive team with a CIO. “These funds alone are able to achieve global best practice,” Urwin said. “I don’t believe that cost (associated with having an inhouse team) is an impediment. It’s about people. The biggest opportunity for funds is to improve their governance but it’s difficult to get it right.”