The parallels between fiduciary management and Formula 1 racing

In the fast-paced world of financial markets, choosing the right team can help pension schemes get over the finish line.

Winning a grand prix takes a talented driver, the right car and engine, and lots of teamwork. Combining these elements with a game plan that can adapt to unforeseen circumstances is what makes the difference.

Success in investing is similar. It's not just about picking winners. Finishing first requires a carefully defined strategy, nimble ongoing management and clear accountability for key decisions.

What's driving the growth in fiduciary management?

Fiduciary management helps pension scheme trustees navigate the markets and reach their funding goals. Today c.£250 billion of assets are managed in delegated arrangements for around 1,000 UK schemes. Assets in fiduciary management have been growing at over 10% per annum for more than a decade, as trustees increasingly look to appoint full-time, professional partners to look after the running of their scheme's investments. This rising trend is being driven by four factors:

1. Increasing investment market volatility
2. Complexity of asset choices
3. Rising regulatory burdens, including ESG
4. Long-term funding targets requiring real-time attention

As uncertainty in the world economy continues to grow, fiduciary management can help. Like the high-stakes, high-risk world of Formula 1 racing, pension scheme trustees are counting on the teams they've helped assemble to set a strategy and execute it. Here are some of the steps required to make sure these plans pass the chequered flag in good time.

Picking the team

A common challenge pension fund trustees face is insufficient time and expertise to keep up with the investment decision-making process. This can lead to weaker risk management and leaves schemes vulnerable in the face of market volatility.

The pandemic focused the minds of many trustees on what decisions they should be responsible for. Despite online platforms allowing them to meet more often, decisions are often still not being made in a timely manner. Those that are might be based on stale information.

Appointing a fiduciary manager allows trustees to focus on areas where their expertise can be more effective. The fiduciary manager is like a team of mechanics, engineers and drivers dedicated to making sure the pension scheme performs to its highest potential. Unlike trustees, this crack team watches the journey (race) unfold through every twist and turn and makes pit-stops as needed to change strategy (tyres) and adapt to evolving situations.

Strategy and planning

Ferrari wouldn't start a race without studying the track, the weather conditions, the length of the race, and so on. Similarly, a trustee shouldn't start their journey without having a plan in place. They should ask themselves how much time they have to reach their destination, how often to pause and review their progress, and how much resource are they prepared to use along the way.

The Pensions Regulator now expects schemes to set long-term funding objectives and define a plan to achieve these. Fiduciary management can help with training, planning and advising trustees, plus implementing the plan and monitoring it, using the right technology. Putting appropriate de-risking triggers in place can help protect against some of the blowouts we've seen in markets recently.

Constructing the portfolio

Like a finely-tuned engine, investment strategies need not just the best components, but also need the expertise to monitor how all these bits are working together. Experience, knowledge and technology can help identify what's performing well, what needs attention, and what needs to be dropped.

At Russell Investments, we take an open-architecture approach to manager selection. This means we only choose third-party active managers in our portfolios, removing the conflicts many fiduciary managers have when using their own funds. We justify that the manager's fund is suitable and best-in-class, and removing it when it isn't performing as expected. We blend these strategies together in custom mandates to give each client the best chance of reaching their own scheme-specific target.

Monitoring performance

Looking at a funding position once a quarter, based on information from weeks – if not months – prior, isn't good enough anymore. Without the proper amount of vigilance, opportunities get missed and risks grow. Trustees need access to real-time information to fully understand the performance of their scheme and where they are on the road.

Fiduciary management puts in place the frameworks to evolve the strategy as market circumstances change. Trustees know at the outset what actions will be taken as the funding position improves – or if it deteriorates. At Russell Investments, our clients have access to daily funding positions and key risk information online, and we tailor each of our reports to their specific requirements.

Evolution

Like Formula 1, investing in markets doesn't stay the same year on year. And neither does the regulatory backdrop and burden for teams and trustees. As fiduciary managers, we help to ensure our clients comply with the latest standards and are ready for the next obligations: active ownership and careful stewardship of their investments, Taskforce for Climate-Related Financial Disclosures (TCFD) reporting, setting funding targets and journey plans, or meeting the Continuing Professional Development (CPD) obligations of being a trustee.

The bottom line

The Formula 1 season is now in full-throttle, and investment markets have seen lots of action recently, too. Now more than ever, pension schemes and their trustees need the right strategy, the right people and the right risk management. The car and the engine make a big difference, but the capabilities, experience and agility of the team are essential.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.