The consulting business? “It’s moving into the electronic age. We’re more and more using the internet for getting data and for the manager search.” This statement by Charles Tschampion, managing director of General Motors Investment Management (the GM division in charge of the company’s pension funds), is very symptomatic of what’s changing in the American consulting marketplace.
The trend is also confirmed by a recent survey conducted by Connecticut-based Greenwich Associates. “The bottom line,” says Bill Jarvis, principal at Greenwich, “is not that the traditional consultants are dead. But the use of the internet by American pension funds and endowments is growing in breadth and depth. A growing number of institutional investors are expecting to use the internet for many services that are currently provided by traditional consultants. So the internet is a challenge they have to respond to.”
Before joining Greenwich, Jarvis worked for 16 years on Wall Street as an investment banker and consultant, so he knows the business in depth from both sides. The new Greenwich survey about the use of consultants by US pension funds (a universe of around 1,400 investors) had still to be published when Jarvis agreed to share the most important trends with Ipe.
“The first key theme is that the use of consultants is already high, stable or even growing slowly,” explains Jarvis, “and this is comforting to consultants.” In 2000, 72% of total funds used investment consultants, two percentage points more than the previous year. Only 5% of the funds terminated their consultants (in 1999, 9% did so) and 2% planned to replace them (same percentage as the previous year). “If you are a consultant , you are likely to keep your business on a very stable basis.”
Medium-sized corporate pension funds and public funds tend to use more outside investment consultants, while the largest ones and the smallest ones tend to do everything internally, but for opposite reasons: the largest ones, because they think they have the know-how; the smallest ones, because they try to keep the business very simple and cheap. This hasn’t changed in the recent years.
“The second key theme is that in the last two years the internet has become universally used by pension funds: 91% had access in 2000 (90% in ’99) and 50 % used it more than 10 times a week. Besides, among the funds that don’t have access yet, 86% expect to gain it in the next 12 months. So in one year almost all funds will use the internet,” says Jarvis.
In this respect (but not only this), the most sophisticated investors are the endowments – charitable money managed by universities, foundations and so on, representing more than $500bn (e525bn) in total assets – 94% used the internet in 2000, while only 88% of public funds (which are very budget conscious) did so. But very large public funds – like the famous California Public Employees’ Retirement System (CalPers) – are also heavy users of the internet: 93% of these had access last year.
Among the websites most often used by pension funds, internet search engines (Yahoo the most popular of all) rank first: 57% of funds use them. After the use of funds’ own intranet sites (more popular among corporate funds), there are the investment managers’ websites, used by 30% of pension funds; and the 401(k) providers’ websites, used by 25% of funds (or by 30% of corporate funds). One in four pension funds use Bloomberg.com; 15% use the Wall Street Journal Interactive. A significant 13% of funds use Inverstorforce.com, the first internet provider of data and tools for the manager search; 11% of funds use the investment consultants’ website. Lower rankings include other financial news websites and efrontiers.com, a company similar to InverstorForce.com, but used by only 1% of pension funds: that’s why it ran out of venture capital money and closed its doors last year.
“It’s interesting to notice that the Investorforce.com website is used more by very large funds (21% of those with over $5bn use it),” says Jarvis. “Probably these funds are more confident in the information technology.” For example, CalPers is one of the biggest clients of (and investors in) Investorforce.com.
What is the internet used for? 58% of funds use it to receive information from managers (first of all performance results of portfolio); 70% want to use it for this purpose by the end of 2002. Endowments are again in the lead: 66% currently receive information from managers, electronically over the internet; 76% plan to receive this in two years from now.
Why is the internet increasingly used by pension funds? At the top of scale ratings are motivations like “the increased speed of accessing information” or “it’s easier to check account balances or review transactions”. But quite an important feature is also the ability to access online consultant commentaries. A lot of funds underline also that over the internet it is “easier to establish short-lists of managers”.
A major consultant firm like Frank Russell tries to put the internet into a different perspective. “The internet is a good tool for having a lot of data at your fingertip,” points out John Osborn, senior consultant with the firm, based in Tacoma. “That’s why it’s very appealing to institutional investors. We at Russell already use the internet to communicate electronically with our clients, but this technology does not substitute our core business, which is still a relationship business.”
According to Frank Russell other trends are changing the face of the US investment consultant marketplace. “There is a shift in focus by the key players from ‘managing the managers’ to ‘managing the investment strategies’.” Osborn mentions the example of a multi-billion-dollar fund, which has around 20 managers and used to spend its monthly meeting trying to decide what to do with these managers. “Then they realised that was not the best way to spend their time. So they decided to delegate that problem to outside consultants Russell. Now during their monthly meetings they talk about the asset allocation or the right strategy for US equities, while Russell manages the managers.” Provided the diversification spectrum and the benchmarks, the mandate to Russell is quite broad: “It’s Russell that hires, monitors and fires the managers on behalf of the fund and it does it at very low costs, thanks to its large economy of scale,” explains Osborn. The pension fund’s monthly meeting only checks the final results, which are usually the managers’ performance.
Another trend in the investment consulting industry, according to Frank Russell, is the increased demand for integrated services. “Our business includes pure information, advice and investment management . Firms offering all the three services (like Russell) can customise their products exactly for their clients’ needs. Other traditional consultants, offering only advice, are experiencing some problems,” says Osborn.
Interestingly enough, managers at Investorforce.com try to keep their role low profile and claim they don’t want to take over the consultants’ role. “We define ourselves as a technology platform, which aggregates data at a speed and level of transparency previously unknown in this business,” says James Morrissey, InvestorForce’s president and chief executive. “But we don’t give advice and we don’t act as a fiduciary trust. Consultants are still needed to interpret the data and suggest the right strategy.”
The most successful InvestorForce’s service is the ‘manager search’ tool, with 4,000 investment products on display, by some 1,400 managers, who agree to pay 5% of their first year revenue if they are selected for a mandate. According to the company releases, in recent months InvestorForce has successfully facilitated 17 money manager searches representing more than $1.2bn in assets; has initiated 25 money manager ‘searches-in-process’ through the site, valued at $5.5bn; and in the pipeline are 100 other searches for more than $10bn. Among the greatest believers in the InvestorForce’s project, as already mentioned, is CalPers, which – altogether with a private equity fund – last September invested $25m in the company and last December decided to utilise the search exchange capability of InvestorForce.com to find a strategic investment partner for the system’s $1bn hedge fund programme. In fact one of InvestorForce’s databases is specialised in hedge funds.