Fiduciary Management

Anton van Nunen, PhD, has headed Van Nunen & Partners, a consulting firm serving both institutional and individual investors, since 1998. His clients have included a number of major institutional investors in the Netherlands and beyond. Van Nunen has not only spelled out the concepts of fiduciary management, he has also implemented them at such institutions as VGZ-IZA, a major Dutch health insurance company, the Campina Pension Fund, and the Yarden Insurance Company. Van Nunen earned a PhD in economics from Tilburg University, where he went on to spend twelve years as an assistant professor.

"Its key message is that fiduciary management is an idea whose time has come…Nunen provides good case study examples". (Investment & Pensions Europe, April 2008)

• Foreword xiPreface xiiiChapter 1 The Pendulum Swings Back in Asset Management 1The Forces of History 1The Rise of Modern Portfolio Theory 3Support for Shares 4The New Paradigm 6The Rise of Indexing 9Discontent with the Paradigm 10The Need for Fiduciary Managers 12Chapter 2 Pension Plans: The Principal Setting for Fiduciary Management 15The Historical Idea of Pensions 15A Patchwork of Pension Provisions 18Organization and Regulation of the Pension System in several OECD Countries 23Denmark 23France 25Germany 26The Netherlands 27Marking to Market 28Sufficiency Test 29Sweden 30Switzerland 31United Kingdom 31The United States 32Australia 33Similarities and Differences 34Commonalities on the Asset Side 36Chapter 3 The Role of the Fiduciary Manager as Chief Advisor 39The Asset-Liability Study 39Thinking through Risk and Return 41Portfolio Construction 42Selecting and Overseeing Investment Managers 43Measuring and Benchmarking 43Education 44The Trusted Counselor, the Fellow Fiduciary 46Chapter 4 Shaping the Fundamental Investment Policies 47Liability-Driven Investments 51Choosing an Active Investment Policy 52Integrating Active Policy in the Overall Portfolio 55Completion Account as a Necessary Adjunct to Active Policy 58The Fiduciary Platform to Integrate Active Policy in the Overall Investment Portfolio 59A Special Case: Bridging the Duration Gap 67What a Fiduciary Manager’s Report Looks Like 68Chapter 5 Asset-Liability Modeling and the Fiduciary Manager 73The Role of the Fiduciary Manager 74The Asset-Liability Model (ALM) 75Policy Instruments Used in Asset-Liability Modeling 78Calculations to Cope with Uncertainty 80The Crucial Role of ALM 81Asset-Liability Modeling in Practice 82Prognosis of Future Reserves without Policy Changes 84Future Financial Situation with Flexible Premium Levels under the Regime of a Fixed Compound Rate 85Future Financial Situation with Flexible Premium Levels under the Regime of Compound Rates Equal to Market Interest Rates 88Future Financial Situation with Changes in Investment Policy 100Policy Changes 102Where Does Fiduciary Management Fit In? 102Chapter 6 Fiduciary Management In Practice—Portfolio Construction 105Defining Appropriate Asset Classes 106Hedge Funds: Weighing the ‘‘New’’ Alternative 106Burrowing In: Defining Sub-Allocations 109Thinking about Style 111Apportioning the Fixed Income Portfolio 112Measure for Measure 112Formulating Mandates for Managers 114Chapter 7 Horses For Courses—Selecting And Overseeing Investment Managers 115Creating the Beauty Parade 116Investment Performance 117Investment Process and Philosophy 117Investment People 118Operational Risk 119Managing the Beauty Parade 121Managing the Transition 122Overseeing the Managers 123Chapter 8 Performance Measurement and Benchmarking 127Why Has Benchmarking Grown More Important? 128The Use of Different Types of Benchmarks 131Liability-Driven Benchmarks 133Strategic Benchmarks 134Fixed Income 136Equities 137Real Estate 139Detailed Benchmarks in the Context of Active Investment Policy 140Active Overlay Management 143Rebalancing 144Measurement of Active Policy 145Chapter 9 The Fiduciary Manager Experience in the Netherlands and Beyond 151Changes in Investment Policy 152Changes in the Role of a Fund’s Investment Committee 153Changes in the Breadth and Depth of Discussions with Asset Managers 153Changes in the Communication Process 154Changes in the Level and Structure of Costs 155Changes in the Importance of the Custodian 156Overseeing the Fiduciary 157Future Developments of the Market for Fiduciary Services 159Beyond the Netherlands 165Fiduciary Management Plus 165Chapter 10 Summing Up Fiduciary Management: What It Is and Is Not 167Goals, Policy, and Responsibilities 167Fiduciary Management Can Enhance Productivity 173What Fiduciary Management Is Not: A Simplification 174Comparisons with Other Investment Management Models 175The Concept’s Claims 176Appendix: Suppliers of Fiduciary Services 181Notes 259Bibliography 265Index 269