Watson Wyatt has copied the example set by Mercer and released data showing how an institutional investor might have performed had they placed assets with investment managers recommended by the firm in key asset classes.
The firm has created a series of Model Portfolios, made up of Watson Wyatt’s preferred manager line-up for that asset class. The performance data, which was independently verified by Deloitte & Touche, covers thirteen asset classes in most major equity and bond markets around the world. “We have been running notional portfolios of managers internally for three years in order to monitor the quality of our manager research and selection,” says Nick Watts, European head of investment consulting at Watson Wyatt. “We are publishing the findings now as part of a move towards greater transparency in line with trends in the industry.”
Watson Wyatt warns that it is not possible for any single measurement approach to fully reflect the fact that individual clients have different requirements, including unique risk budgets but, although the Model Portfolios are therefore notional, the firm says “every effort” was made to combine investment managers with the appropriate risk and style profiles so as to simulate a real client portfolio.
And the first published results show that during the three-year period from inception, all thirteen Model Portfolios outperformed their benchmark, before transition costs (applied every time there is a change in manager) and fees. After fees and transition costs, only the emerging markets equity Model Portfolio underperformed. “We felt it important to allow for key aspects such as investment manager fees, transition costs and capacity constraints at individual managers to approximate reality as much as possible,” explains Craig Baker, European head of manager research at Watson Wyatt.
Nick Watts warns that the figures, which will be published annually, are better indicators of performance when measured over longer periods. “It is important to remember that asset management is a cyclical business and therefore a long-term view is essential,” he says. “Ideally, the longer the period the more accurate, but our three-year verified record is sufficient to demonstrate that we are on the right track.”
Watson Wyatt will not be releasing any names of the underlying managers. Instead, Watts says the firm chooses fund managers on three main criteria: business management, people, and investment process. The firm has concluded that ‘people’ are the key differentiator within investment management organisations and that many of these ‘people’ are in turn dependent on the right business platform. It believes that these subjective factors, coupled with the complex set of circumstances of each client, “contribute to the weakness of measurement in this area.”