First published in Engaged Investor, 24 May 2017
Richard Butcher, managing director of PTL talks about his bugbear in any investment mandate but particularly a fiduciary one, that it is rarely clear who is involved.
I’ve got teenage kids and as a consequence, one of my recurring nightmares is the “facebook party”. You’ll have heard about these. Your teenage child asks “can I have a few friends round while you’re out on Saturday?” You reply, “Sure, but not too many and behave yourselves.”
The party got well and truly out of hand.
Lots of parties do this and often, as with a facebook party, the first you’ll know of it is when you have to bear the consequences.
One of the schemes I am a trustee of has a fiduciary mandate with a major investment consultancy. It’s been in place for a few years and predates my appointment. To be clear up front, they seem to be doing a cracking job. We set them an objective relative to the value of our liabilities and not only are they achieving it, but they are exceeding it – without increasing our risk, reducing our liquidity or changing our duration. They are making good calls in relation to asset allocation and the underlying investment managers. Fair play to them and well done.
As a diligent trustee however, I still asked some questions.
One of my bugbears, in any investment mandate but particularly a fiduciary one, is that it is rarely clear who is involved - who handles the money? Who authorises the money? Who audits it all and who has legal liability? My questions, on this mandate, focused on these issues.
My first question was, “Who are the counterparties?” Rather curiously, the response I got was: “I don’t know”. To be fair, the question was dropped into the conversation without advance warning. It was duly taken as an action to email me a list.
A month passed, then two. Finally, ten weeks later the email dropped into my inbox. I should have realised the length of time hinted at the complexity of the answer.
Attached to the email was a pdf. I was on a plane at the time (we were waiting for a slot) and I opened it on my phone. Bad move as the list was long and the font size small. It was however, clear enough to do a quick count. 142. 142 counterparties to the fiduciary mandate. 142 mangers, custodians and administrators!
On the plus side, there was some duplication - firm A acting as custodian to more than one asset class - which reduced the length of the list. On the negative side, the list excluded a number of non-cash handling counterparties such as auditors and lawyers.
My fiduciary mandate had gone “facebook party” and as with the nightmare about my kid’s party, my co-trustees and I ran the risk of any consequences. Who does handle the money I am responsible for? Who authorises cash movements? Who is checking all of this and who has a liability to me if it goes wrong? I’m still asking questions. I’m still probing. I’m learning.