Week 6 (3)

Question 1

Investment Consulting

Answer 1

The main roles played by investment consultants are in
relation to investment strategy and giving advice on selecting outsourced investment managers. They usually also provide investment performance monitoring and
review services, as well as operational support to their
clients.
Giving investment advice does not mean that the consultant is responsible for the outcome of the advice –- responsibility for decisions still rests with the asset owner.
This creates a principal-agent problem wherein the agent
(the consultant) does not suffer from a negative outcome
(poor investment results) in the same way as the principal.
The importance and roles of investment consultants varies
by geographical location. For example, in the UK and
Ireland, investment consultants play a significant role in
advising institutional investors, particularly defined benefit
pensions funds, whilst in the rest of the world, the situation
is more diverse.
The relative importance of investment consultants depends
to some extent on historical conventions and the
investment regulations which exist in a particular country.
Regulations can require certain organisations and
investors to seek expert investment advice as part of any
investment decision-making. Where this is the case,
investment consulting usually has a bigger role.

Question 2

What is Fiduciary Management?

Answer 2

This is where the
investment consultant directly manages the assets and has
discretion over which investment manager(s) to use and
sometimes to vary the investment strategy within specified
boundaries.

Question 3

Appropriate context around past Manager Performance

Answer 3

• What market environment existed over some or all of the track
  record?
• What strategy or style did the manager pursue, and was it
  constant throughout?
• Was the manager’s personnel stable, including responsibilities or
  how they might be incentivised; what role have key people had
  during the period?
• How has market competition changed over the period, or how has
  information availability changed?

Question 4

Fiduciary Management

Answer 4

Fiduciary Management involves the investor appointing their
consultant to manage their investments on an integrated
basis through a combination of advisory and delegated
investment services, with a view to achieving the asset
owner’s overall investment objectives.
This has become popular with investments for pension
scheme assets and to a lesser degree with insurance
company investments.
In a fiduciary management arrangement, the consultant
implementing the programme will bear full responsibility for
the investment outcome subject to constraints agreed at the
outset.

Question 5

Criticisms on Fiduciary Management:

Answer 5

Fiduciary management has been subject to two main criticisms,
both of which represent conflicts of interest.
1) The first is that
consultants are incentivised to expand the scope of their services
and the complexity of client portfolios through the addition of
fiduciary management services. 2) The second criticism is that
fiduciary managers generally make significant use of internal
funds, which could be directly managed or follow a fund-of- funds approach, which restricts the ability of investment managers to
market their funds to such clients.

Question 6

Performance Measurements

Answer 6

• Absolute performance measurement figures, both for a
  whole fund and/or for individual asset categories or
  individual investments.
• Performance relative to:
  (a) An investment index;
  (b) A notional benchmark fund; and
  (c) A specified universe of other funds (depending on relevance).
• Measures of investment risk.
• Risk-adjusted performance measures.
• Attribution analysis.
• Long-term performance statistics.

Question 7

What is Survivorship Bias?

Answer 7

Survivorship bias is the tendency for investment management
companies with poor performance to be removed from
performance surveys or reports. Removing these – while
retaining the winners – creates a bias that overstates the firm’s
true, aggregate performance. This phenomenon, which is
widespread in the fund management industry, results in an
overestimation of the past returns for the firm.