Confidence and commitment
Warwickshire Local Authority Pension Fund
Consistent access both to managers and information is the key to monitoring service delivery by fund managers, according to Phil Triggs, group pensions manager at Warwickshire local authority.
The information-gathering starts at the selection stage. Initially, the scheme relies on "the accurate and precise data, knowledge, expertise and comprehensive, up-to-date databases" of investment consultants.
The fund, which switched its approach from balanced to specialist in 2004 in an attempt to meet higher targets, tendered for a £50m (€74.2m) real estate fund manager last autumn.
Post-selection, the scheme relies on fund managers' flexibility and willingness to provide bespoke information.
"We need to be able to liaise with client relations staff regarding the ease of extraction and reliability of investment data and reports," he says, adding that a key quality measurement is the "speed at which problems are resolved".
As a result, effective management also depends on access to managers. Warwickshire requires fund managers to attend investment board meetings, for example - not least because it provides an opportunity for the fund manager to "articulate what has driven their outperformance and the factors resulting in under-performance. We also look for confidence in their philosophy, style and approach and are not influenced by fads or whims."
Otherwise, the operational monitoring of service quality boils down to checking compliance with the mandate, cooperating with the fund's global custodian and monitoring investment returns against the benchmark.
But Triggs points out that quality is also an issue of perception.
"The perception arises from the individual's own observations and experiences associated with an investment house and the individual fund managers and associated staff," he says.
Overall, he's optimistic that fund managers understand that they need to deliver in order to keep the mandate. "A very high standard of excellence exists and any fund manager will need to compete with the best in class in order to succeed," he says.
Blue Sky Group
If pension funds want to ensure fund manager quality they should stop treating real estate as an asset class apart, says Raymond Satumalaij, real estate fund manager of Blue Sky Group, which administers Dutch airline KLM's pension fund. The faultlines for service quality lie at the beginning and end of the relationship.
The process for KLM starts with the selection of a manager with a pre-existing degree of alignment - then nailing down the criteria, as it did for its US private real estate fund.
Blue Sky's model is unusual because it is based on multiple pension funds pooling their portfolios. In future, Satumalaij predicts that European pension funds will pool their domestic and European portfolios into discrete pan-European funds that will be fully invested and allow the investors to benefit from each other's returns. "I don't know why [pension funds] haven't already done it," he says. "It's a cultural issue, and perhaps there's a problem about who should be taking the initiative. It's a concern for them that they don't necessarily know each other." Blue Sky tried it in the Netherlands in the late 1990s after deciding on investment in indirect rather than direct real estate investment. This first effort - with the creation of a private fund and the selection of a manager for it - didn't pan out.
The next time, with the private real estate fund in the US, KLM set out clear terms and conditions at the start. It worked. The fund, which started with $250,000 (€189,000), is now worth $1bn "mainly because the manager has acted all along in the spirit of what we were talking about," says Satumalaij.
Just as important as fund manager selection is the ability to dispense with their services should they fail to meet initially agreed standards. Here, he claims, real estate needs to catch up with the rest of the financial services industry.
"If the manager believes in his or her own capabilities, they'll accept this as in any other part of financial services," he says. "Why should real estate alone be immune? Our fund manager was aligned from the beginning and we applied the standards of the financial markets to real estate as well."
Instant dismissal acts more as an additional incentive for the fund manager to adhere to the mutually agreed guidelines than as an imminent threat.
"If we were to let the fund manager go, we'd still have the problem of finding someone to manage the portfolio so, obviously, it would have to go really badly for us to apply it," says Satumalaij. "But it's a way for us to keep control and to ensure the manager adheres to the guidelines."
Third Swedish buffer fund AP3's decision last year to diversify into global real estate makes the manager service quality issue acute. With the target real estate allocation set at 8.5%, it has yet to appoint external fund managers.
However, it has signed an advisory agreement with Aberdeen Property Investors Indirect Investment Management for advice in relation to indirect European and Asian property funds. AP3 is currently less than 3% invested in real estate.
"We haven't yet made the commitment, though we have signed an agreement with a consultant," says head of alternative assets Bengt Hellström. The consultant will co-determine the criteria for measuring fund manager service quality.
"It's a combination of parties," he says. "It won't be just us - we're not doing anything alone."
However, he indicates that service quality criteria will reflect those applied to other portfolios in the scheme.
"The key is to have a relationship with the manager," says Hellström.
"You need to feel you're getting satisfactory information from reporting and at annual meetings - and that implies a certain level of contact. The processes need to be solid.
"That's our principle and we haven't run into any problems managing fund managers so far."