An article in yesterday’s Financial Times, entitled “’150 people’ will control UK funds”, underscores what has been common knowledge for some time – that the investment consulting industry has become increasingly concentrated. Buying larger brands of consultants is considered the “safe” option. However, the result is that pension funds are being invested in fewer and fewer larger asset managers or fund platforms, and the trade-off is poor advice.
This highlights one of the most common mistakes made by pension fund trustees – signing up for big brand advice results in, by definition, entirely unoriginal solutions. While many trustees readily accept that “following the herd” is sub-optimal, behaviour would suggest that beliefs and actions are a world apart.
We have, for some time, said that it is difficult, if not impossible, for only a handful of large consultant “gatekeepers” to dispense creative, forward-thinking advice to their hundreds, if not thousands, of clients. By definition, large consultancies can only access a small number of mega funds on an industrial scale. There is no benefit in spending time researching smaller, niche strategies, as flooding those managers with new money would destroy the essence of their competitive advantage – being small and niche. Instead, they are hamstrung into investing in fund managers that can provide significant capacity for their clients. This constraint, by its very nature, deprives their clients the opportunity to invest in less-crowded strategies where real alpha can be generated.
It is an inconvenient truth for the investment consulting industry that size is the enemy of performance. While most trustees will be swayed by promises of economies of scale and lower costs, this provides an even bigger opportunity to those trustees who choose to move away from the herd.