Funds managing assets in-house should report to their members on how these assets have performed versus properly constructed market based benchmarks, according to an advisor at PwC.

David St. John, urged an audience of 37 institutional investors to raise their standards of reporting voluntarily, but said that if this did not happen then regulatory intervention may be needed.

The added transparency would improve accountability and thereby lead to improved investment performance, allowing boards to carry out better governance of their investment teams.

“It is not to say the internal teams do not have integrity, it is just that these funds have a vested interest and this needs to be managed,” he said. “And the large funds should be showing leadership by making the investment performance of their internally managed products publicly available as this would assist other funds contemplating in-house management to make fully informed decisions.”

Funds could more generally improve the standard of reporting for their investment options by being transparent in the reporting of performance versus properly constructed market based benchmarks to allow members to more easily compare the success of their fund against others on a ‘risk adjusted’ basis.

He gave an example of a poorly constructed benchmark as a fund whose performance attribution showed all its outperformance came from infrastructure and where this asset class was benchmarked too conservatively. “The underlying assets were illiquid, involved construction risk and had leverage,” he said, pointing out this type of situation can lead to investment staff being inappropriately remunerated, so it is important that boards and their committees are across this level of detail.

James Oliver, partner at Deloitte, complemented St. John’s message by warning that there a growing trend for regulators to expect those managing money, whether as external fund managers or internal teams not just to be meeting base level compliance, but to be seen to be executing trades in the best possible way.

He pointed to learnings from the Libor rigging scandal, where the investment banks which were penalised had built up a culture of penalising whistle-blowers or where senior management did not want to hear bad news. Oliver warned he had seen teams in domestic institutional investors’ teams with the same attitudes.

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