A daunting experience: NTMA’s investment management
That the NTMA was in clear control of the type of managers it wanted for the fund and the type of contract it was seeking to enter into was clear from the off in this huge RFP.
One pertinent example came in the second stage of the appraisal, when the NTMA solicited managers for more detailed proposals on the mandates. Investment houses may have been more than a little surprised to see in their letter of invitation the inclusion of the investment management agreements the NTMA expected them to sign should they be successful.
Deborah Reidy of the NTMA’s manager selection team comments: “We asked for their comments on this and told them that they would be taken into account in the scoring.
“If they were not willing to accept the draft terms, then that counted against them. A few tried to question the agreements when they sent in their proposals. Most were willing to accept our conditions!”
Reidy goes on to explain in more depth the scoring process for the tender. “Basically we wanted to make things as clear cut as possible, with no room for ambivalence. Whoever ended up with the top score after the interview was the winner – subject to satisfactory completion of a due diligence site visit and ratification by the commission.
“The advice we had from our lawyers was followed precisely – the highest composite score won.”
One notable factor that Reidy highlights among the score criteria was AIMR/GIPS investment standards compliance by managers. “This was very important to us. However, we took the view that while most of the US managers are already compliant, a lot of European managers are in the process of doing so. Therefore we felt that it wasn’t in the interests of the fund to ‘require’ AIMR/GIPS compliance. What we did say though was that we would penalise those managers that were not compliant – particularly those that said they had no intention to become compliant. After that there were different levels of penalties, depending on how far a manager had come in being compliant.
“Over time I think it will be more important to be GIPS compliant and may well be a necessary criteria for being a manager with the fund.”
Reidy explains that another stipulation by the NTMA for its manager hires was that it sought firms that could show a strong competitive advantage in their asset class.
“The problem is how do you define ‘competitive advantage’. We decided that this could be a well resourced research machine for some, or an investment process that we felt was unique for others, or a use of systems that compensated for any lack of resources.
“I think though that looking for a competitive advantage is the most important thing for investment managers – too many don’t differentiate themselves.”
In terms of the size of manager the fund was seeking, both in terms of assets and staffing numbers, Reidy states that there was no direction on whether the money should go to large players or boutiques.
However, she notes one stipulation: “With regards to assets under management we did not want to be the largest account with an asset manager – so a manager was disadvantaged if this was going to be the case.”
Another major criterion in the evaluation process points system though was risk management. “If the house did not have some kind of risk management system – and to my surprise there were a number of managers that ticked the box to say that they didn’t – then that house was out.
“At this stage we were not concerned whether the system was proprietary or through an external vendor. In fact, for this first stage we said that proprietary could be something as simple as an ex-post tracking error spreadsheet. You had to have something though because we were going to require investment managers to stay within ex-ante risk/tracking error bands.
“If the manager fell outside this band we asked if they could tailor the risk of the product – if the answer was no they were also eliminated from the search.”
A three-year track record was also an absolute requirement, according to Reidy. “If you didn’t have this then you weren’t in – and there were quite a few managers who applied without the three-year data!”
The NTMA then asked managers to explain the figures they were providing and to supply the monthly performance figures for at least three years. From these numbers the agency made its own calculations of a manager’s performance numbers and tracking error.
As Reidy notes: “As a former consultant I know that you can ask two investment managers for their numbers and get two different answers. One difficulty here though was currency. For example, we had US managers trying to convert to euro and doing it the wrong way.
“Calculating the tracking errors ourselves, highlighted where the investment managers had had problems converting their returns into euro, because if they told us that their tracking error was 6% and they had done the conversion wrong then often they ended up with very distorted tracking error and we had to go back to them and question their numbers. Then maybe they came back with the right numbers!”
In such a thorough, complicated process you expect a number of errors on behalf of those applying. But managers may need to be a little more aware in how they approach such a tender, for fear of looking foolish!
Colleague Elaine Hudson recounts the story of one UK manager who sent an e-mail to the NTMA asking for clarification of which countries were in the euro.
“We wanted to write back, in the immortal words of John McEnroe: ‘You can’t be serious!’”
“With another household-name investment manager we gave them the spot rate for conversions from dollar to euro and they came back to us asking for the formula!“
Reidy concludes with a comment that will surely provide food for thought among managers that applied for the NTMA RFP: “If some investment houses knew the comments that came out of their own RFP departments they would be mortified!”