The investment horizon for super funds has expanded far
beyond the traditional asset classes of stocks and bonds. The proliferation of
complex alternatives such as hedge funds and private equity is driving a trend
towards specialisation in the investment consulting industry as consultants look
to allocate research resources more effectively. KRISTEN PAECH reports.

Consultants
are under pressure to revamp their advice offerings as profit margins are
squeezed and all facets of the industry reassess the adequacy of their value
proposition in the new market environment. It is not uncommon for super funds to
seek guidance from more than one source, with the $3.7 billion Vision Super using
Frontier Investment Consulting as its general consultant, Sovereign Investment
Research as independent consultant for private equity and J G Service as
adviser for property.

The $28 billion AustralianSuper retained both JANA and
Frontier as its asset consultants following the 2006 merger between Australian
Retirement Fund and Superannuation Trust of Australia. As funds and their
in-house investment teams grow in scale, they are increasingly looking for
specialist knowledge from their consultants, who are attempting to research a
deeper, broader universe of opportunities. Acknowledging the difficulties that a
traditional consultant faces in doing this, Mercer Investment Consulting
recently transformed its manager research team into four separate boutiques
covering equities, fixed interest, real estate and alternatives.

The aim is for
each boutique to act as an expert in its own area, with the alternatives
boutique split into ‘alpha’ and ‘beta’. “What we’ve found in recent years is
that the range of products that we research for our clients has expanded enormously,”
says Andrew Kirton, global head of investment consulting at Mercer. “It’s no
longer possible for consultants who work with clients to be an expert across
all of the product range; it’s too broad and too deep. In quite a number of the
new alternative asset classes that we research, you need a level of expertise;
you need to have experts closely connected with clients.

As the world gets more
complex, to do the job for clients we have to become more specialist and grow
that expertise, and when you grow that expertise it calls for a different type
of organisation.” Kirton says increased competition from niche consultants, who
are vying for a “sliver” of the consulting pie, was another major driver behind
the new structure. “There are a number of organisations that take a very thin slice
of the universe,” he says. “They just focus on private equity products or real
estate products and build depth in that area.

We want to be able to compete
against those boutiques.” The Australian arm of Russell Investments has
likewise undergone an organisational restructure in response to more complex
demands from clients, which has seen three client silos created – corporate
super (under Linda Elkins), institutions and government (under Keith Knapman)
and retail (under Patricia Curtin).

The idea is that the services Russell provides
can now more easily be accessed by all clients. “It used to be that if an
endowment client wanted, say, actuarial services, that function was embedded
within the corporate super area and it was difficult to bring across; there’d
be ‘blue dollars’ (transfer pricing) involved,” says managing director Chris
Corneil. “Now we’ve separated the functions from the client clusters so that
our functional specialists are accessible to everybody from an industry fund to
an SMSF.” Explaining its recent decision not to re-tender for some headline
asset consulting posts (for example FuturePlus and Westpac Staff Super) Corneil
says Russell wanted to focus on relationships where it could create “high
levels of value”, and simple “data delivery” of its recommended manager lists
for each asset class did not fit this bill.

He points to the implementation services
area, headed in Australia
by John Moore, as an example of the services Russell will increasingly offer to
large institutions. “We don’t just talk theoretically to our clients about the
frictional costs of changing managers; we have a transition management team
that trades US$2 billion every day,” he says. “That’s a competency that none of
our competitors have.” Corneil said advisory consulting remained important to
Russell, but ideally as just one part of the “smaller number of deeper
relationships” it would like to have in Australia in future.

“I really
liken it to us being the investment architect, working with our clients to
define their goals, creating the strategy to reach them, and then actually
bringing the ideas to fruition,” he says. According to David Chessell, partner
at alternatives consultant Access Capital Advisers, the key is to develop a business
model that can withstand any market environment. Access advises on around $6
billion in unlisted assets, most of which is held directly, and about $6
billion in listed market assets.

“The danger is getting structures that are not
suitable across all time periods,” he says. “It’s good to have specialisation when
you actually want to invest in a particular area but part of what we’re trying
to do is be across the whole universe and to be assessing what’s the best area
to be in, especially in the alternatives space. “The size of the firm is going
to be a much more key consideration when super funds are deciding who they want
as their investment adviser.

There’s a widespread recognition of the need to be
across all areas, you need a wide skill-set.” With many large industry funds as
its clients, Frontier has carved out its own niche area of expertise in
advising on unlisted assets, although this is just one part of the general
consultant’s offering. Infrastructure, property and private equity are all
offered as either stand-alone services or as a package, for those clients who
are interested.

Managing director Fiona Trafford- Walker says Frontier thinks of itself as a
“generalist firm that has specialist capabilities” and going forward, is
looking to bring more specialisation into the business. “We recognise that the
industry is going more down the specialist path and we’re obviously looking to
respond to that but one thing we want to make sure we keep is the ability to
look at the whole portfolio,” she says. “Sometimes when you look at an asset
class, it’s overvalued, and if you’re a specialist that just does that [asset class]
you can’t always see that because you don’t get to see the whole universe.

We’re
trying to keep that whole of portfolio perspective which says ‘Maybe we like
property long term, but right now it’s expensive’.” JANA adopts a similar
philosophy in that the consultant believes there is no single solution to the
investment challenge, and that everything is interconnected. Ken Marshman, head
of investment outcomes at JANA, says while it would be efficient to try to
separate investment opportunities into different sub-components, in practice it
proves difficult. “Property is related to debt, which is related to equities,
and private equity is a sub-set of equities, and infrastructure is part equity,
part property, part fixed interest,” he says.

“While you have to have some efficiencies
and you have to have some specialisation, and there are benefits of specialisation,
most of our investors are interested in delivering strong, balanced outcomes
and to do that requires a very strong integration across all the different
investment opportunities, and understanding those risks.” He says the process
of investment research cannot be separated from the process of delivery of
advice, “and that is fundamental in the way we are structured”. “You can have
the smartest research people but if they don’t understand what the investment
problem and the client is, then all that brilliant research is no good,” Marshman
says.

“On the other hand you can have people who understand
the client problems perfectly well but if they don’t understand the nature of
the markets then the best research will get lost.” Mercer is attempting to
overcome this hurdle by keeping the communication channels open between its
four boutiques. Andy Barber, global head of manager research, says Mercer is
taking steps to avoid the danger of the boutiques acting separately. “The
equity researchers cover equity long/short products, so there are linkages between
them,” he says.

Kirton adds: “What we’re not trying to do is be factional and
turn Mercer from a global investment consulting business into a series of
individual businesses that don’t talk to each other.” While access to
specialists is important, there are obvious pitfalls in the multi-consultant model.
One is the cost to the super fund of using more than one adviser, particularly
where the asset class the advice relates to makes up only a small portion of
the overall portfolio.

Where funds are using more than one consultant, Marshman
says there needs to be clear and tightly monitored boundaries. “There are real
traps where multiple consultants are concerned and there needs to be clear
understanding of accountabilities and responsibilities where you have more than
one adviser, as the risks are tripping over other people’s work and lack of
clear accountability,” he says. “It can work, but it requires a fair bit of
very clear management by the funds in question.”

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