What happens when a consultant buys a fund manager

Paul Berriman, the head of a $ 5 billion fund management business within consultancy Willis Towers Watson, isn’t one for verbose self-promotion. On a decidedly spartan LinkedIn profile, he gives his job simply as “maestro”.

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Greener on the other side? Towers Watson believes it has made a success of its move across the advisory divide

Paul Berriman, the head of a $ 5 billion fund management business within consultancy Willis Towers Watson, isn’t one for verbose self-promotion. On a decidedly spartan LinkedIn profile, he gives his job simply as “maestro”.

The business he leads, Towers Watson Investment Management, is likewise not famed for aggressive marketing. But perhaps it doesn’t need to. Its parent advises pension funds and other investors worth $ 2.3 trillion worldwide – that’s plenty of potential clients.

Yet therein lies a PR problem. Willis Towers Watson has become known in the industry for its broadsides against excessive fund management fees, and for spreading the message among its investor clients, chiefly pension funds, that while active management talent certainly exists, there are far too many also-rans charging too much for disappointing returns.

So when the consultancy acquired a $ 1 billion multi-asset boutique, Oxford Investment Partners, in mid-2013, renamed it Towers Watson Investment Management and began promoting its fund to clients, it was a move sure to set tongues wagging in the industry with accusations of hypocrisy, or at least conflicts of interest.

Value drive

The launch of five multi-manager funds since then, and growth in assets to $ 5 billion – ahead of the firm’s initial target – will hardly have quietened the critics. Multi-manager funds are often attacked for layering on fees.

But Berriman, a former fund manager at Deutsche Asset Management, says Towers Watson Investment Management fits right in with the consultancy’s value-for-money drive.

For a start, it styles itself as a low-cost manager. TWIM takes a management fee of between 20 and 50 basis points on its funds, for its work picking and overseeing a set of fund managers who invest chunks of the portfolios, and risk-managing the overall fund.

While this fee comes on top of the fees charged by the managers themselves, Berriman argues WTW’s status as a scale buyer of fund managers’ services means its clients benefit from bulk discounts.

For example, its Hedge Advantage fund – Berriman calls it “a fund of hedge funds without the egregious fees, and lots of concentrated positions” – has secured discounts from the hedge funds in which it invests. The average fee charged is 1.2% of assets, with a 14% performance fee.

This compares with hedge funds’ traditional two-and-20 fee structure, on top of which a pre-2008 fund of hedge funds might add another one-and-10.

Berriman said: “All the savings that we get from the fund managers we pass directly on. We are competitive with the other asset managers.” The flagship fund, known as the Towers Watson Investment Partners fund, is available for 50 bps and is the only one to charge a performance fee – 10% of profits over its target. This compares with a market rate of around 65 to 75 basis points for an institutional diversified growth fund; the class of funds with which Partners is usually compared.

Shout about

Berriman feels the firm has quite a lot to shout about on the performance front.

In the past three years, the £526 million Partners fund has made an average 6.8% a year, net of fees, slightly behind equities but with lower volatility, and beating most funds in its peer group. Berriman said: “Sometimes it gets compared with a diversified growth fund because its target is not dissimilar – equity-like returns with less volatility.”

Two things stand out when comparing Partners to most of the institutional diversified growth funds that have been around as long: its small size, and lack of daily liquidity. Investors can only sell out once every three months.

This means it can invest in many niche illiquid strategies; Berriman cites as emblematic a $ 25 million investment in Japanese solar power in summer 2015, which has so far made a 59% return.

He said: “We have always argued that you have to shine a light in dark corners, and source really interesting ideas that most people can’t. Everyone is trying to second-guess all the short-term market movements; we do none of this. We don’t sit around talking about Chinese growth. When we say this to people, sometimes they look at us like we’re a bit potty.”

The Partners fund depends for its idea generation on Willis Towers Watson’s team of 120 researchers. But some fund managers are unhappy that WTW criticises other DGF managers, while its own firm has one to sell.

In a note published in March, Towers’ research team said some DGFs showed “low skill in tactical asset allocation” and said “many have destroyed value” through trading. The document did not mention the Partners fund, which prides itself on eschewing tactical trading.

Very unhappy

One asset management marketer said: “There were people who were very unhappy about that article. We try to be a bit more grown-up about these things; fund managers can’t be too churlish about consultants having their own products, as some fund managers offer advisory services too. But I would say they should be transparent and disclose the conflict.”

But Berriman argues this is “not a conflicts question” because the Partners fund is “so different” to a DGF, as it is illiquid and capacity-constrained: “It is more akin to long-term, endowment-style management where asset allocation remains the same for years.” He said it got compared to DGFs because “it shares similar performance and volatility targets”.

Since being acquired by Willis Towers Watson in 2013, the TWIM team has launched five additional funds – the most recent of which got going only nine months ago. Berriman says these funds are designed to have “far greater capacity than the [original] Partners fund will ever have” but he is adamant they are not about asset gathering.

He said: “If it doesn’t exist, and it’s a good idea, and we want it in our clients’ portfolios, then we will invent it and make it happen. We are not going to launch another global equity fund.”

Instead, it has a series of less mainstream offerings, such as its Hedge Advantage fund and a Diversifying Strategies fund, which invests in commodities, emerging market currencies, reinsurance and volatility trading.

Its suite is rounded out with an Alternative Credit fund, a Core Diversified fund – a more liquid and tradeable version of the Partners strategy – and the new Global Equity Focus fund.

These are all intended as one-stop shops for pension funds too small or too busy to build complex alternatives portfolios themselves. Berriman said: “Most clients will say: if you are telling me I need to go off and hire eight fund managers doing eight different things, I haven’t got the time for that.”

• TWIM takes aim at closet trackers

Towers Watson Investment Management’s most recent fund, the Global Equity Focus fund, is intended as an antidote to closet-tracking. Launched about nine months ago, the fund comprises the top 10 to 15 stock picks from Willis Towers Watson’s eight favourite equity fund managers. It has attracted more than $ 300 million from the consultancy’s clients so far.

Berriman, who declined to disclose the eight managers’ names, described them as “pretty much the antithesis of benchmark-huggers – they all have high active share, and take very large positions against the benchmark [index].

“When we went to these managers with this idea, the reaction that came back was ‘we have always wanted to do this’. They, like everyone, don’t care passionately about stock number 43 or stock number 85 in their portfolio; those stocks are there to risk-manage the business.”

David Shapiro, portfolio manager for the new fund, said that when reviewing equity funds on offer from asset managers, he had been “dispirited by the preponderance of expensive index-hugger-type products”.

Willis Towers Watson declined to provide details on the fee charged by the fund, but Berriman said it would be available to investors at a “competitive price”, including both “our fee and the management fees”.

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