Asset manage­ment best practices

Funda­men­tal requi­re­ment: a complete speci­fi­ca­tion of the mandate

The tender should be based on a detailed and complete speci­fi­ca­tion of the asset manage­ment mandate. The first step is to convert your own invest­ment stra­tegy into a mandate stra­tegy. The mandate speci­fi­ca­tion process also includes defi­ning a measura­ble bench­mark for the mandate. Setting out the invest­ment style is crucial: should the mandate be execu­ted with an active manage­ment style focu­sed on outper­forming the bench­mark, or with an index-orien­ted style aimed at inves­t­ing assets in a tax-effi­ci­ent and cost-effec­tive way? Any sustaina­bi­lity crite­ria to be taken into account in the invest­ments must also be speci­fied when defi­ning the invest­ment style. Last but not least, it is crucial to specify the finan­cial instru­ments: should the mandate be execu­ted with direct invest­ments, or through coll­ec­tive invest­ments (e.g. funds, ETFs)? Coll­ec­tive invest­ments offer various advan­ta­ges, espe­ci­ally for assets of up to CHF 100 million. These include rapid diver­si­fi­ca­tion, cost and tax bene­fits, and clear and simple struc­tu­ring of securities.

Compe­ti­tive tender

To obtain the best asset manage­ment solu­tion on the open market, at least three compe­ti­tive bids must be obtai­ned when putting the mandate out to tender. Based on the mandate speci­fi­ca­tion, poten­tial provi­ders are given a struc­tu­red ques­ti­on­n­aire – known as a ‘request for propo­sal’ – with ques­ti­ons cove­ring the essen­tial requi­re­ments for the tender object. During the tender process, active asset mana­gers are evalua­ted on the basis of five crite­ria, known as the ‘5 Ps’: perfor­mance, price, process, people and product charac­te­ristics. If a sustainable invest­ment style is to be pursued, the desi­red sustaina­bi­lity crite­ria should be speci­fi­cally addres­sed in the questionnaire.

Trend towards inde­xed mandate solutions

Among large insti­tu­tio­nal inves­tors such as pension funds, there is a trend towards inde­xed, cost-effec­tive and tax-effi­ci­ent asset manage­ment. The index­ing approach can be based on the weightings or the market capi­ta­li­sa­tion of the secu­ri­ties in the mandate, but it can also take sustaina­bi­lity crite­ria into account. Price is one of the most important conside­ra­ti­ons when weig­hing up diffe­rent provi­ders in tenders for inde­xed asset manage­ment manda­tes. It is ther­e­fore no surprise that the bidding process and pricing struc­ture for inde­xed asset manage­ment are highly trans­pa­rent and homo­ge­neous compared to active asset manage­ment. Based on the mandate volume put out to tender, it is possi­ble to accu­ra­tely predict what the resul­ting pricing struc­ture will look like. The inten­si­vely nego­tia­ted fees for manda­tes tende­red by the inde­pen­dent consul­ting firm c‑alm AG from 2013 to 2022 are shown in the graph below.

Howe­ver, conduc­ting a compre­hen­sive assess­ment of all the cost and tax compon­ents in asset manage­ment is tricky and requi­res rele­vant exper­tise: in addi­tion to the asset manage­ment fees and the custo­dian fees, the product fees for the coll­ec­tive invest­ments in the mandate are also important. The Total Expense Ratio (TER) shown for each coll­ec­tive invest­ment can be used as an indi­ca­tor. It is also important to check the swit­ching or entry fees for the mandate. These can make a big diffe­rence, espe­ci­ally when trans­fer­ring an exis­ting invest­ment set-up to a new asset manage­ment mandate. In such case, not only are invest­ment fees incur­red for the new mandate solu­tion – so too are fees for selling the exis­ting secu­ri­ties. These swit­ching costs can be redu­ced signi­fi­cantly during the tender process by also conside­ring in-kind contributions.

Last but not least: make or buy?

Inde­pen­dent consul­tancy firms like the author’s usually offer their tender exper­tise on a fee basis. The lump-sum consul­tancy fee can range from 15,000 to 30,000 Swiss francs, depen­ding on the comple­xity of the mandate speci­fi­ca­tion and the object of the tender. The larger the mandate volume, the more precise the mandate speci­fi­ca­tion will be. And the more complex the trans­fer of secu­ri­ties from the exis­ting setup to the new mandate, the more sense it makes to involve a consul­tant. For smal­ler mandate volu­mes of 0.5 to 30 million francs, the website www.economico.ch now offers a useful free tool for inde­pendently carry­ing out a trans­pa­rent cost compa­ri­son of diffe­rent, compe­ti­tively priced asset manage­ment solu­ti­ons. You can enter your indi­vi­dual invest­ment stra­tegy into this website, speci­fy­ing your desi­red invest­ment style (inde­xed or ESG), and then compare offers from various banks and asset managers.