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Trustees risk litigation with inappropriate benchmarks


Henry Hickman | Partners | Litigation Department

On Wednesday 10 May Harcus Sinclair LLP hosted a seminar to discuss how trustees could be at risk of litigation (or, at the very least, severe criticism) because of the benchmarks they select to monitor investment management performance.

The event, chaired by Martyn Gowar, now retired ex-Senior Partner of Lawrence Graham and Private Client STEP Awards Chairman, was opened by Russell Bussey of Trustee Investment Consulting. Russell questioned the viability and integrity of benchmark selection by trustees and shared concerns that trustees are unaware of risks and are leaving themselves open to litigation from settlors and beneficiaries as a result of missing out on market returns. “Too often trustees are not given full disclosure on all the options available to them and the consequences.  If it’s almost to the point of rarity when benchmarks are used properly, and with any thought then, as a key requirement of the Trustee Acts imposed to guide trustees, it must be that many benchmarks are unsuitable,” Bussey said.

Kristopher Heck of Trustee Investment Consulting provided an overview of the three types of benchmark currently utilised: peer group; absolute; and, market. He reasoned that, whilst peer group indices are useful to ensure that an appointed manager was not underperforming against his competitors, over time such indices performed well below the actual market return. As a result trustees who were signing off regular investment reports as satisfactory were in fact missing out on vital additional returns.  Absolute benchmarks were discussed as being a very useful tool, especially for large family offices with illiquid investments and where capital was to be preserved. However, he pointed out, that again, market returns may outstrip an inflation plus benchmark. Added to this, during market downturns, it is possible that a manager may need to short investments to meet the absolute benchmark mandate.  “Unless this is expressly allowed through the trust deed, this could create a technical breach of trust,” Heck argued, adding that “the most effective benchmark is market based as these are a comparison against the actual market’s performance.” Instead trustees should spend more time understanding and discussing their goals and risk profile with advisors and then agreeing a target asset allocation designed to meet the needs of the trust and reflective of the mid to long term nature of the investments.

Sparrows Capital, represented by William Ladenburg, spoke about the inherent conflicts that arise where investment consultants recommend investment firms who are also paying clients of their peer group benchmarking services. He cited examples of investment consultants continuing to recommend incumbent managers based peer group analysis, despite consistent superior returns from rules-based investment models.  This underlines the need for managers to disclose their performance relative to actual market benchmarks.  “It is clear that first quartile performance is not as universally understood as it ought to be.  It can, and is, being subjectively claimed,” Ladenburg said.

The event was arranged by Harcus Sinclair litigation partner, Henry Hickman, to raise awareness of trustees' duties under the Trustee Act 2000 and the law generally in relation to investment manager appointment and monitoring. He felt that trustees are sleepwalking into potentially litigious situations by agreeing to be measured, without proper prior consideration, against certain benchmarks that do not provide a realistic comparison with how equity markets have performed.  Although, on one view, the law sets a relatively high bar for a beneficiary seeking to sue his trustee for breach of trust in relation to poor investment performance, it is evident from the number of such cases that settle (and the paucity of case law) that both investment managers and trustees consider that, when faced with such criticisms, it is better to settle than to fight.  That must be because in many of these cases there is a viable complaint which needs to be answered. 

It was concluded that trustees should seek help from professional advisors when establishing a new trust or reviewing existing trust investment assets to ensure that an appropriate benchmark is established as part of a trust’s Investment Policy Statement to allow trustees properly to understand how investment managers are performing.

For more information please contact:

Harcus Sinclair LLP:   Aby Pickard +44(0)20 7242 9700

TIC:                             Russell Bussey, Principal +44(0)20 3873 2726

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