For small funds without significant inhouse capacity, outsourcing is the only real option, although consultants highlight the need to have one key DAA decision-maker within the fund, preferably the CIO. “We have no problem at all being in a multiple consulting relationship but you just need to make sure that there’s someone at the fund who can coordinate all of the views,” Trafford-Walker says. “I describe that person as a master puppeteer; all the advisers are the puppets and you need someone back at the office who can coordinate or bring us together. That’s why you’ve seen more of these specialist providers come in on asset allocation rather than everyone having multiple general consultants.” Chee believes independent global consultants like Watson Wyatt are well placed to meet the DAA needs of super funds, given their ability to leverage global asset class research and their lack of bias towards specific asset classes.
“Any DAA process requires multiple inputs, you absolutely need to seek multiple views and even for clients that we advise on DAA we encourage those clients to seek multiple views as well,” he says. “Consultants can be a critical input to a DAA process but at the same time, for clients that can’t run that entire process internally, there is certainly scope for consultants to take responsibility for making some of those decisions, should the key stakeholder see that as a value adding proposition.” One model that Watson Wyatt uses for a large UK pension fund clients is best described as a partnership between the consultant and the fund. The fund has an internal asset allocation committee that meets on a monthly basis and Watson Wyatt consultants attend that meeting. “We take our analytic support and we discuss our views based on that analytic support to help them make decisions,” Chee says. Another model he envisages working for funds without the internal resources is to delegate the decision-making process to an external party, such as an asset consultant. Given DAA is mediumterm in nature and requires significant mispricing to be confident of deriving value over time, Chee says the views taken are likely to be high conviction and low frequency in nature.
“As a result I think consultants are well placed in that regard to form views and to provide input,” he says. “Consultants can take a longer term view on things and…in the normal course of events, any consultant running a DAA process should be showing a neutral view across asset classes. Managers, for historical reasons, are always expected to have active views so the timeframe tends to be shorter when looking at manager performance and manager activity.” Mercer’s Calder says he has a number of smaller clients that don’t have an investment committee and in these circumstances the funds management capacity falls to a broader finance committee. “For those smaller clients they’ll be looking to Mercer to essentially drive the process and they’ll respond to our recommendations, but if you were to go to the other extreme and consult a more sophisticated client, it would be more of a partnership between both the investment committee and Mercer,” he says. Doyle claims there is a case for DAA to be set in a single structure and delegated to a fund manager.