Investment consulting:
where does it go from here?
Nicola Ralston, FSIP examines the role played by consultants in these
turbulent times and asks what their role will be once the dust has settled
BY: NICOLA RALSTON, FSIP
EXECUTIVE SUMMARY
quarter in the fi rst nine months of 2008, a reduction in favour of
almost any other asset class has helped to limit the downside.
• Diversifi cation and new techniques have helped,
though not as much as expected.
DIVERSIFICATION BENEFITS
• Many consultants are becoming asset managers.
Even though drawdowns have been reduced by holding more
• The challenge of how to measure and value advice
non-equity assets, some argue that diversifi cation has been less
remains unresolved.
helpful than expected. In most hedge funds, for example, returns
have been much better than equities, though extremely
disappointing in absolute terms. In many cases, liquidity has also
As institutional investors have watched dried up as a result of the imposition of redemption gates. Much
A
markets plummet, how are they feeling depends on the specifi c investments and the time horizon of the
about their investment consultants? A individual investor; nonetheless, the concept of an investment
recent survey by Amin Rajan of which captures a greater percentage of the upside than the
CREATE Research suggests that the majority of downside still has attractions, and it also remains the case that
funds are at best lukewarm about their advisers. exposure to a diversifi ed portfolio of hedge funds gives investors
Have investment consultants helped steer a course exposure to a diff erent package of risks than is available through
through troubled waters or are they just parasites long-only equities or bonds.
feeding on a diminishing pot of assets? One area in which diversifi cation has proved of far greater
One feature of recent times has been a decisive signifi cance than at any time within living memory for most
move away from peer group analysis in favour of investors has been management of cash and collateral. Any
advice relating to each client’s specifi c investor with an exposure to sub-prime mortgages or Icelandic
circumstances, so it is harder than it used to be to banks has discovered this the hard way. In most cases, while
assess the impact of the consulting profession. generally recommending a diversifi ed cash portfolio, I would
Nonetheless, one change that has been widely argue that consultants cannot claim any credit for highlighting the
recommended has been to increase diversifi cation counterparty risk in cash and enhanced cash funds.
through exposure to a wider range of asset classes, One of the lessons of the current downturn is that although
typically by reducing heavy exposure to equities. too much diversifi cation may appear to be sub-optimal in terms of
Investment consultants have favoured a variety of greater costs or lower returns in the good times, only a truly
alternatives, with some being keener on currency diversifi ed portfolio can minimise catastrophic loss. Th ere is
management or commodities, for example, but always risk in being over-concentrated, whether the excessive
the general move to diversify, and to do so exposure is to a stock, an asset class or a single counterparty.
globally, has been almost universal. A greater focus on minimising risk versus fund-specifi c liabilities
Has diversifi cation helped investors? As in all has been a feature of much recent consulting advice. While liability
fi nancial crises, correlations between markets jump driven investment (LDI) in its purest sense is simply an approach
just when you least want them to. And it has been that specifi cally measures the risks that a scheme is running against
government bonds, the traditional alternative to the discounted value of its liabilities, LDI has often been
equities, that have provided the best diversifi cation synonymous with sophisticated investment banking products that
from equities, rather than newer alternatives. Even combine an element of interest and infl ation swaps with a Libor-
so, with global equities down by more than a plus approach for the remainder. For most schemes the adoption of
32 WINTER 2008/09
32-3432-34 consulting .indd 32consulting .indd 32 27/11/0827/11/08 15:54:3115:54:31
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