Shayla Walmsley investigates why Towers Watson and Mercer have both been building up their teams.

For an idea of where a business is going, there are worse places to start than with its new hires. In the last few weeks, Towers Watson and Mercer have both been building up their teams. Towers Watson took on Peter Lewis as head of its US real estate investment manager research team, while Mercer hired Matthew Abbott as a senior researcher in the UK. In a statement on his appointment, Abbott was, as new hires usually are, "delighted" to be joining at "an innovative time".

What is innovative about it is that consultancies seem to be trying to take on multi-managers at their own game. In fact, some have already come out and done it. Russell Investments operates both investment consultancy and multi-manager businesses, for example. Towers Watson has not ruled it out.

The move has less to do with the inherent appeal of the multi-manager model than with pressure on investment consultants to justify their fees. "Investment consultants are under pressure to prove they add value as intermediaries," says Jenny Buck, former head of multi-manager at Schroders. "There's an element of investment consultants questioning whether fund managers have generated any alpha - and why they don't have a go themselves."

For Buck, the question is whether it can do so without a major conflict of interest. 

Few investment consultants deny there is one - at least in theory, if they have a product to sell. Adam Calman, head of Europe at The Townsend Group, which was this week majority-acquired by private equity subsidiary Aligned Asset Management, points out that his firm only invests in third-party vehicles. "We don't have direct property funds," he says. "We never have had, we don't have and we never will have."

Another argument is: where isn't there a conflict of interest? Russell Investments has constructed Chinese walls between the multi-manager and consultancy businesses, according to senior investment consultant Lloyd Raynor. If there is an indication that the consultancy client is interested in a multi-manager product, it goes immediately to the sales team, and the adviser withdraws.

"Clients are grown-ups," he says. "There's always a potential conflict of interest. If the adviser is paid on a time-cost basis for manager selection, there will be a built-in bias toward active funds."

Given a clear encroaching trend, the question is whether investment consultants will be any good at it. According to Paul Jayasingha, senior investment consultant at Towers Watson, there are three significant differentiators - though he stops short of describing them as competitive advantages.

The first is that it is easier for consultants to have a negative view of real estate. Whereas multi-managers depend on a positive view, consultants can direct investors toward other strategies. 

Secondly, consultants are in a position to look at different forms of real estate exposure, including listed and debt investments, in contrast to multi-managers' focus on non-listed funds (and, increasingly, direct joint ventures). Back in 2009, for instance, Towers Watson took the listed opportunity to its clients. "Valuations were very attractive, and you didn't need to take the illiquidity risk in unlisted real estate," says Jayasingha. "I don't know of many multi-managers who did the same."

Of course, multi-managers have on their side the fact this is their core business. Graeme Rutter, head of multi-manager at Schroders, says both investment consultants and multi-managers can handle the core fund universe equally well. When it comes to niche or more esoteric products, this is not the case. "We're property experts. This is what we do," he says.

Thirdly, consultants tailor what they offer specifically toward their clients' requirements. After all, there are no suggestions this is the end of consultancy as we know it. A subset of pension funds will always want control over every aspect of decision-making: larger schemes with in-house teams, for example, might use advisers for specific asset classes; small and medium-sized clients may well outsource more of the management function.

"We have clients saying 'Don't give us a big list [of managers] - just give us the answer'," says Jayasingha. "The demand has always been there, but now pension funds are trying to cover a number of areas: liabilities, sponsor risk and asset allocation strategies, for example. Selecting managers is not necessarily at the top of the list. For them, it's a question of prioritising decision-making. They may well choose to outsource decision-making where it can be done more effectively."

To that end, there is no fundamental change in the investment consultancy business. The only change will be in the style of consulting - and in terms of building up stronger operational and legal teams.

"There's this perception that investment consultants set up multi-manager businesses to get onto a good thing," says Raynor, "but, in fact, clients are asking for guided advice, and trustees want to govern, not manage, which means they want someone else to handle the operational management." 

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