Pension fund trustees should stop using market indices like IPD to measure managers’ performance, says leading consultant Hewitt Bacon & Woodrow.
In a paper released last month, the firm urged trustees to adopt new ways of benchmarking success for both property and equities. These could include absolute or inflation-linked returns or a comparison with returns from gilts.
“IPD do a very good job in terms of peer group benchmarks.
“We’re just saying you could arguably give the fund manager more flexibility to better align their strategy to that of the scheme within an overall strategic benchmark,” said Nick Duff, senior property consultant at HBW.
“Pension funds’ liabilities are often inflation-linked.
“If you’re looking at future liabilities, then arguably a retail price index-based benchmark is best.”
At present, most funds measure their property performance against the IPD index, usually on a three- to five-year rolling basis.
Ian Cullen of IPD said funds used it as much a management tool as an ultimate yardstick.
“In terms of understanding where performance is coming from, setting absolute returns as a benchmark is as useful as a glass eye,” he said.
A move to adopt absolute or inflation-linked returns as a benchmark could alter the way fund managers structure their property portfolios.
“It pushes you to take a longer-term view and away from low yield,” said Gerry Blundell of LaSalle Investment Management.
“You’re more likely to go for property that is strong on income and leases that haven index-linking provisions.”
Duff agreed: “The fund manager will build up the portfolio in a different way to what he would normally use in terms of a peer-group benchmark.
“He might want to focus solely on high-yielding industrial property to best meet that objective, because over the long term he’s taken the view that’s the asset that will produce the best performance.”
But Jeff Jacobson of LaSalle Investment Management said this approach carried risks: “If one takes big bets in certain sectors, at the extreme, on one asset it can work very well or very badly.
“The principles of diversification can’t be ignored.
“Everybody wants both a return above liabilities and to beat the market benchmark. Both are relevant,” he said.
“There has to be a tangible way to measure that you’ve done better than other managers.
“But it’s not good enough to say everybody else is bad, and I’m the tallest dwarf.”
Former Hermes chief executive Alastair Ross Goobey, who is president of the Investment Property Form, thinks the property market will be less affected by such a move than the securities market.
“For property, it is always difficult to be index-replicators, since all properties have their own characteristics,” he said.
“However, people do construct property portfolios by looking at the weightings in offices, retail and industrial, and by region.”
References: EGi News 07/07/03
