Asset Management Industry Trends For 2013

Posted by Susan Mangiero on February 08, 2013

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Life in asset management land will never be the same again. According to "The Future of Asset Management" by Maha Khan Phillips (CFA Institute Magazine, Jan/Feb 2013), operating margins are under pressure, asset growth is anemic, investors are moving away from equity around the world and competitive pressures are not going away. This is bad news to some but great news to those who recognize that tumult gives birth to profitable opportunities. Expanding on this notion of a lucrative brave new world, Ms. Phillips cites target date funds, asset allocation strategies and customized solutions as promising areas for further commercialization.

Ms. Phillips includes a section about the growing fiduciary management marketplace, adding that "fiduciary managers are posting significant gains in assets." As we know too well, some investors do not have the requisite size or skill (or both) to address increasingly complex issues, especially as the regulatory whirlpool is getting dangerously more active and likely to drown those who are unable to swim. Professional Pensions reporter Rachel Dalton cites KPMG's measurement of the UK fiduciary management market as having grown by 40% in 2012 or "the equivalent of 2.4%" of total retirement plan assets under management for 174 schemes. They estimate this annual increase equates to 23 billion GBP "under full fiduciary management" and an additional 30 billion GBP in "partially delegated" arrangements. See "Fiduciary management on the rise," December 13, 2012. Click to access the "2012 KPMG UK Fiduciary Management Market Survey," November 2012.

In "Regulatory Forecast Bodes Change" (onwallstreet, February 1 2013), Kenneth Corbin writes that financial professionals and their clients could be asked to deal with a flurry of new initiatives, including but not limited to, the following: 

  • Dodd-Frank and its many provisions;
  • Expanded fiduciary duty as per the U.S. Department of Labor;
  • Formal Self Regulatory Organization ("SRO") oversight by the Financial Industry Regulatory Authority ("FINRA") should it change its mind and decide to pursue this course of action again;
  • Development of a uniform fiduciary standard by the U.S. Securities and Exchange Commission that imposes similar responsibilities for broker-dealers and advisers alike; and
  • Commodity Futures Trading Commission ("CFTC") mandated guidelines and limits for users of derivatives, many of which are fiduciaries. 

Hot off the press, one consulting firm affirms others' predictions with its call for a "growth in fiduciary management appointments" and "increased attention to risk and risk management" in 2013. Based on its study of retirement plans in 13 countries with a combined $29.75 trillion in assets, they further predict "sponsor-fiduciary tension" and "focus on risk management and governance of DC [defined contribution] arrangements." See "Global Pension Asset Study 2013," Towers Watson, January 2013.

Based on copious litigation and enforcement research and analysis I have conducted as a financial expert, it is clear that there is increased tension between investors and their asset managers and advisers. There are numerous legal actions being brought against investment management organizations and their leaders, many of which allege fiduciary breach and "excessive" risk-taking and/or insufficient oversight. Most attorneys with whom I have spoken expect to see more action in the dispute resolution area. Product development is fast occurring in the legal arena to exploit this trend. Witness the surge of third-party litigation financing firms and brokers such as BlackRobe Capital and Advanced Legal Capital.

The bottom line is that the global investment management industry of $120+ trillion in assets is experiencing an unprecedented upheaval of the status quo. For those executives who can connect the dots and have an appetite for innovation, start mining the gold. For those that are expecting a return to halcyon days of yore, strap yourself in for a bumpy ride.

ERISA Pension Plans: Due Diligence for Hedge Funds and Private Equity Funds

Posted by Susan Mangiero on April 02, 2012

Join me on May 1, 2012 for a timely and interesting program about alternative investment fund due diligence and other considerations for ERISA plan sponsors, their counsel and consultants. Click here for more information.

This CLE webinar will provide ERISA and asset management counsel with a review of effective due diligence practices by institutional investors. Best practices will be offered to mitigate government scrutiny and suits by plan participants.

Description

With the DOL's and SEC's new disclosure rules and heightened concerns about compliance and valuation, corporate pension plans that invest in alternatives must focus on properly vetting asset managers more than ever before or risk being sued for poor governance and excessive risk-taking.

The urgencies are real. The use of private funds by asset managers is crucial for 401(k) and defined benefit plan decision makers. Understanding the obligations of private funds is essential to any retirement funds with limited partnership interests.

In addition, suits and enforcement actions against asset managers make it incumbent on counsel to hedge fund and private equity fund managers to fully grasp and advise on full compliance with the duties of ERISA fiduciaries to plan participants.

Listen as our ERISA-experienced panel provides a guide to the legal and investment landmines that can destroy portfolio values and expose institutional investors and fund managers to liability risks. The panel will outline best practices for implementing effective due diligence procedures.

Outline

  • ERISA fiduciary duties for institutional investors
    1. Hedge funds and private equity funds compared to traditional investments
  • Regulatory developments
    1. Disclosure
    2. Compliance
    3. Valuation
  • Developments in private litigation involving pension plan fiduciaries and alternative fund managers
  • Best practices for developing due diligence plans

    • Benefits

    The panel will review these and other key questions:

  • What are the regulatory concerns for ERISA pension plans that allocate assets to hedge funds and private equity funds?
  • What are the potential consequences for service providers that fail to comply with new fee, valuation and service provider due diligence regulations?
  • What can counsel to pension plans and asset managers learn from recent private fund suits relating to collateral, risk-taking, pricing, insider trading and much more?
  • How should ERISA plans and asset managers prepare to comply with expanded fiduciary standards?

    • Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.

    Faculty

    Susan Mangiero, Managing Director
    FTI Consulting, New York

    She has provided testimony before the ERISA Advisory Council, the OECD and the International Organization of Pension Supervisors as well as offered expert testimony and behind-the-scenes forensic analysis, calculation of damages and rebuttal report commentary for various investment governance, investment performance, fiduciary breach, prudence, risk and valuation matters.

    Alexandra Poe, Partner
    Reed Smith, New York

    She has over 25 years of experience in investment management practice counseling managers of hedge funds, private equity funds, institutional accounts, mutual funds and broker-dealer advised programs. She counsels hedge and private equity fund advisers in all stages of their business and due diligence matters.

    Pension Risk Management and Governance: Challenges and Opportunities in a New Era

    Posted by Susan Mangiero on January 04, 2012

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    Please join me and fellow panelists on January 24, 2012 fro. 4 to 6 pm for a topical discussion about pension risk management and governance. Given that the last few years have posed unprecedented challenges for plan sponsors, both corporate and public, as well as their asset managers and consultants, life in employee benefit land will never be the same again. Market volatility, low interest rates, increased scrutiny about carrying out fiduciary duties, calls for better disclosure and greater complexity keep pension decision-makers busy.

    Hear what legal and financial professionals have to say about what keeps plan sponsors and their advisors and asset managers up at night and how they can implement best practices for pension risk management within a fiduciary framework.

    The roster of speakers who will address both defined benefit and defined contribution plan best practices and concerns include:

    • Mr. William Carey, President, F-Squared Retirement Solutions
    • Attorney Gordon Eng, General Counsel and Chief Compliance Officer, SKY Harbor Capital Management, LLC
    • Dr. Susan Mangiero, CFA, FRM, Risk and Valuation Consultant and Expert Witness
    • Attorney Martin J. Rosenburgh, CFA

    Continue Reading

    Should Onshore Hedge Funds Have Outside Directors?

    Posted by Susan Mangiero on March 08, 2011

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    According to former fund of hedge funds Chief Operating Officer Rajiv Jaitly, pension funds and other institutional investors should be able to "nominate independent directors to hedge fund boards." This would satisfy the goal of making sure that no conflicts of interest exist between directors and fund managers and to "meet the increasingly stringent demands of institutional investors." Pierre Emmanuel Crama, head of operations-related due diligence at fund of hedge funds Signet Group offers that the Cayman Island model is in need of repair since some offshore entity directors sit on too many boards and cannot devote sufficient time to each individual fund. The author of "Hedge fund directors should be nominated by investors, says former COO," Charles Gubert (COO Connect, March 7, 2011) goes on to say that large hedge funds may not be too interested in this kind of set-up. Capital-hungry funds or start-ups may be more open to the idea.

    At the strong suggestion of a prominent hedge fund attorney, I am exploring service as an independent board member. Given my background in due diligence and investment best practices, along with time spent on several trading desks and many years in risk management and valuation, I am confident that I can add value in numerous ways. While my sample so far is only three funds (each of which invests in the billions and has a reputation for good governance), there does not seem to be enthusiasm in having someone "poke around" and comment accordingly. One hedge fund compliance officer told me that several pension funds would not greenlight them without an independent director in place for their onshore vehicle but the legal department was reluctant to have outsiders gain access to highly confidential documents. Two other hedge funds said they liked the idea but were not yet ready to act.

    Invariably, this concept will take hold but not without a push from institutional investors and/or regulatory mandates. As an advocate of free markets, it would be better by far to have industry respond willingly versus being forced to comply with a "one size fits all" statute.

    More broadly, there seems to be a shifting balance of power in favor of cash-rich institutional investors such as pensions, endowments, foundations and sovereign wealth funds in some situations. Supply and demand forces will determine whether a U.S. hedge fund chooses to move in the direction of independent oversight at the board level. I understand the need to keep certain pieces of information under wraps. Moreover, hedge funds have their hands full right now with new rules. Discussions I've had with several other hedge fund attorneys suggest that private company managers are reluctant to give up control over the kinds of strategic decisions that would fall under the purview of a board that includes outsiders.

    Only time will tell. Institutional investors, especially pension funds, are under great pressure to evidence that they've conducted a comprehensive due diligence study of their asset managers (not just at inception of a relationship but on an ongoing basis). I've talked to pension auditors, executive directors and trustees who tell me that they plan to continue voting with their feet if they cannot get the kind of information and assurances they need.

    Should the concept of independent directors for onshore funds take hold, the next challenge will be how to compensate outsiders for their time and what kind of liability insurance terms they will need before agreeing to serve.

    Better Pension Plan Governance Needed

    Posted by Susan Mangiero on January 28, 2011

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    In case you missed it, "Better Pension Plan Governance Needed" by Marlene Prost (Human Resource Executive Online, September 9, 2010) explains how and why defined benefit pension plans are worrying board members of multinational corporations. Nearly every single executive polled for the "Global Benefits Governance Survey 2009/2010" states that "their pension plans pose a potential risk to their organizations' business strategy" and reputation.

    Dr. Susan Mangiero, CFA, FRM is quoted as saying that "inadequate governance can cost the corporation in many ways," including, but not limited to:

    • Drain on cash that could otherwise be used for wealth creation projects on behalf of shareholders
    • Ratings downgrades which in turn drives up the cost of capital which in turn reduces attractive investment opportunities which in turn can diminish share price
    • Negative headlines that could thwart mergers and acquisitions, discourage new employees from joining and make potential customers too jittery to add to the company's bottom line
    • Liability insurance premiums can go up and/or terms are rescinded which in turn increases a plan sponsor's risk exposure
    • Political backlash whereby U.S. and non-U.S. regulators say "enough" to free market solutions and impose a "one size fits all" solution that is costly to implement.

    The recommendation is to act decisively and put retirement plan governance at the top of every director's "to do" list.