This is the last in a series of five articles, written by John Morris and Nick Malaczynski, on international investment by pension funds. Morris and Malaczynski are the managing director and chief institutional consultant of TriStar International Consulting Limited, a company which provides international investment consulting services to South African retirement funds.
The Pension Funds Act requires pension fund trustees to employ experts to advise them on issues such as international investment. The law states that it is the duty of the board of trustees of a pension fund to "obtain expert advice on matters where board members may lack sufficient expertise".
As pension funds begin to invest overseas, the job of those responsible for pension fund assets becomes more complex.
Instead of one market and one currency, international investment requires a pension fund to deal in many markets, currencies, assets, investment styles, and, ultimately, a number of international asset managers.
Can a pension fund handle these challenges on its own?
A recent Wall Street Journal pension fund survey of European pension funds concludes that they cannot. There is an important role for international investment consultants.
The survey examined the experiences of large European pension funds with consultants. It concludes that consultants play an important role advising pension funds when they invest outside their home country, and that pension funds "predict they will rely on consultants more and more in the years to come".
"Diversification, that credo of the sophisticated investor, also pushes people into markets about which they know little, increasing demand for professional help," the Journal reported.
The manager of a $3 billion (R13,8 billion) pension fund told the Journal, "We only need a minor problem for people to understand they can't do it solo when they invest abroad".
When asked in the survey where consultants add the most value, the European pension fund managers listed these consulting services in order of importance:
* Setting benchmarks and targets;
* Selecting a short list of prospective international asset managers;
* Determining allocation of assets among managers;
* Drawing up a long list of asset manager candidates;
* Conducting final manager selection interviews;
* Negotiating the asset manager's agreement; and
* Negotiating the manager's fee.
European pension fund managers surveyed reported that they used consultants mainly for long-term asset allocation, manager selection, and performance measurement.
The survey showed that European pension funds "don't like it when their consultants take night jobs". The biggest vote of no-confidence came when pension fund managers were asked how they felt about consultants branching out into other businesses. Drawing the most negative reaction were consultants who also engage in "stockbroking."
While very few pension funds felt that consultants' fees were cheap, there was strong consensus that money spent on consultants is a good investment. The complexity of international investment "places a premium on good decision-making and makes advice look cheap, whatever the price."
"When you have a large pension fund, top-quality advice can repay itself many times over in comparison with average street-quality advice," the manager of an $18 billion (R82,8 billion) British pension fund said. "Poor advice is the most expensive thing you can buy."