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Impact Investing

IPE special report May 2018

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If ‘manager of managers' was once the way SEI chose to explain its European business, it has now embraced fiduciary management. Or as Patrick Disney, managing director of SEI's EMEA institutional business, likes to put it: "When we started here, head office told us to sell what they called a ‘bundled outsourced retirement platform', which I always thought was a bit of a mouthful. But essentially it was what we now call fiduciary management."

In other words, SEI claims, it was already waiting for the moment when it could offer its full outsourcing or fiduciary management service. Manager of managers, although a core competence and a part of a fiduciary offering, was essentially an interim position.

"The end-game was always to get to what we now call fiduciary management, continues Disney. "It's not a new thing to the company but it's a new implementation for us in London. The idea of combining advice and implementation is at the heart of SEI's institutional offering globally." This reflects the changing nature of institutional business - with risk management and greater emphasis on shorter-term asset allocation at the heart of many offerings.

SEI was originally founded in 1968 as a technology and financial administration company by Al West, who is still CEO. It developed systems for trust and investment accounting but soon branched into what became known as ‘multi-style, multi-management' and ‘total outsourcing' for institutions such as smaller and mid-sized pension plans and college endowments. An unsuccessful foray into investment consulting, with the purchase of AG Becker in 1983, ended in the early 1990s when the unit was sold.

By comparison, SEI's rival Russell scaled down its consultancy operations over the past 10 years or so, only to revive them just recently. Apart from the fact that the business didn't make money, West says he became uncomfortable with consulting and didn't like the fact that clients often took so long to implement ideas that they became stale or out of date. "The other thing we didn't like was that within the firm we had 100 consultants and there were 100 answers," he adds. "The continuity of quality is also difficult because of the people."

SEI started around 10 years ago in Europe with a London office and a joint venture with a French company. As Ed Loughlin, an SEI veteran of some 31 years and global head of institutional business, told journalists in April 2001: "We don't think the world needs another investment manager, consultant or trustee but we do think that institutions need to manage retirement plans better." Almost nine years on - and given the increased complexity of investments and a need for asset allocation decision-making that lies somewhere between the strategic and the tactical - that statement still holds true.

The European growth path has  been fairly steady. According to its figures, SEI managed just €190m in Europe by end-2001 but put on a growth spurt in the following 2-3 years, reporting €2.2bn by end-2002, and €3.4bn for 59 institutional clients (an average of €57m each) by end-2004. By end-2006 there was €3.6bn and 66 institutional clients, an average of €55m per client. The firm managed €3.8bn by end-2008.

According to West, SEI made the mistake of chasing alpha in 2007: "We got a little aggressive and paid for it in 2008." A year ago the firm also reduced its headcount by around 10% - the first redundancy programme, West says, in 18 years. This followed a 2008 revenue reduction of 8.8% - the first drop in gross revenues since 2002 - and a 21.6%, 12-month revenue drop to 30 September 2009.

"We feel pretty good about what we have had to go through and where we are now. It was lean and now it's leaner," as West puts it, noting that the redundancy programme barely affected Europe, where the firm is still adding people. "I think the company is in pretty good shape and we think we are in good shape in each one of our markets."
Indeed, the institutional business unit added $7bn in 2008, of which $2.4bn came from Europe. West also says he was much happier about performance by the end of 2009 than towards the middle of the year: "We've got that all flushed out. We've changed a lot of mandates."

West says SEI is now looking for better and more consistent track records, particularly in high alpha strategies: "We were thinking that higher volatility strategies would cancel each other out but it turned out that, come the bad times, they all went together. We've changed just about all of that. And we've learned a lot."

Becoming a fiduciary manager has also meant some specific changes for SEI, and some quite recent. For one, it is rolling out an asset allocation overlay strategy that better knits the manager of manager competency together with the fiduciary management concept. Essentially this means more dynamic management of mandates for institutional clients.

Accordingly, West says "quite a few" people have been appointed to asset allocation functions internally, in one way or another, while two external overlay managers have been hired to give recommendations: "Different clients will decide how far they will want to go, depending on their risk tolerance and also their tolerance for volatility." Effective implementation, using synthetic overlays, helps keep trading costs down to a minimum.

An asset manager also has a considerable advantage over a consultant in asset allocation, according to West: "You have such an tremendous advantage when you are custodising and using the assets yourself. You can watch them essentially on a daily basis and you certainly manage the managers much more closely than you do as a consultant."

"One of the things that is the biggest difference with our fiduciary management is that we bring corporate finance into pension finance. With a pension fund, if it is volatile and even if it is high alpha, the company will end up putting a lot of cash in. The dynamics of the two mean you have to pay a lot more attention to beta, as much attention, or more, than you do to alpha."

Disney says SEI is already working with its largest client on this more dynamic approach to asset allocation: "We're already with our largest client on being more dynamic. This is very client specific but I recognise that there is a demand," he says.

"Our programme was always fiduciary management," concludes West. "We add components that others don't add - such as the tying into corporate finance and managing it that way, coming up with a solution that optimises both the pension plan and the corporation. To our knowledge no-one else is doing this." And while others think the management of DB assets is a declining business, particularly in the UK, West notes that it does mean demand for more dynamic services - fiduciary management in particular.
 

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