Delegated investing comes in many shapes and sizes, argues Zuhair Mohammed

Delegated investing – the delegation by trustees of day-to-day investment decisions and implementation to consultants or asset managers – is often said to suit just one particular type of pension scheme. But the reality is that we have found it appeals to many types of scheme.

Through our market research we have heard a wide range of views on the suitability of delegation, which is also referred to as "fiduciary management" or "implemented consulting". Some interviewees and respondents have offered the opinion that delegation is for large schemes but others believe, just as strongly, that it is for small ones. Similarly, we have heard that delegation is only for de-risking while others suggest it is for re-risking. Some say it is for trustee boards that are short of investment specialists, yet others say that delegation is still right for boards which are packed with investment experts.

The reality is that Aon Hewitt's Delegated Consulting Service is for all these types of pension scheme and more. Our delegated pension scheme clients in the UK range in total asset size from £6m to £1.3bn.

There is no formal size bar at either end of the spectrum. Some schemes
have delegated to us the day-to-day decisions and implementation relating to their entire portfolio, while others have limited their delegation to
part of their portfolio. Our delegated mandates range from £6m to
£550m assets.

In some cases trustees have merely put a toe in the water. This is their
first experience of delegation and initially they want to limit their exposure. One has delegated 20% of its large scheme and asked us to run this portion as if it were a stand-alone pension fund. A number of our clients have delegated to us the management of a particular asset class, for example, long equities or, more commonly, alternatives.

Some clients impose particular guidelines on us. For example, one has said we must use five equity managers, while others set particular ranges for each asset class. As long as these restrictions are agreed in the investment management agreement we can accommodate them – we also have a simple process for agreeing any changes to the restrictions with trustees at a later date, so the model retains its flexibility. Either way, we have robust processes in place to ensure we operate within parameters set by trustees.

Our approach is suitable for both de-risking and re-risking mandates. Many of our delegated clients have achieved a significant reduction in risk anyway, partly through diversification. They have seen a marked fall in volatility through us diversifying not just at the major asset class level but also through diversified investment strategies and styles within an
asset class.

We are often asked if all our delegated clients were previously clients of Aon Hewitt's advisory investment consultancy. Some were clients already but many of our delegated clients are new to the group. Some use only our delegated services while some also use our traditional investment consultancy.

Some clients have independent trustees – who often have extensive investment knowledge – and some do not. Some trustees work closely with their sponsor's finance director, but some do not. It's clear that our delegated clients come in many shapes and sizes.

We have structured our service to retain flexibility and this was because we designed it around efficient building blocks. We combine these building blocks – a broad range of funds run by carefully-chosen asset managers, which have been selected by Aon Hewitt's manager research team and passed our extensive due diligence tests – to construct tailored portfolios to meet clients' varied investment objectives. This approach allows us to operate a repeatable and scalable process, while still providing a highly tailored service.

But there is no substitute for listening and our research, carried out over four years and now covering about 800 trustees and pension professionals, has helped us to identify the crucial requirement for flexibility and tailoring to meet an individual scheme's real needs.

If you would like to receive a copy of our 2011 Delegated Investment Survey report, due out later this the summer, please contact us on 020 7939 4745 or email enquiries@aonhewitt.com

Zuhair Mohammed is chief executive of delegated consulting services at Aon Hewitt

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