What next on the agenda?
With its passive managers in place from mid-January this year and the five active global equity and pan-European equity managers following soon after in early April, the NTMA had to set its sights on the daily monitoring of its managers and issues such as performance and risk analysis. The agency simultaneously brought in two external systems to look after the analysis.
The performance analysis firm, StatPro, picked up the mandate to provide the fund with its performance measurement system, while US consultant Wilshire won out on the brief for risk measurement.
Deborah Reidy explains how the fund will measure its managers going forward: “We will be calculating daily performance and risk numbers from the data provided by our global custodian ABN Amro Mellon.
“To this end we have already calculated performance on the funded managers through the end of April and May and will be examining these figures in depth on a monthly basis.”
The contracts laid down by the NTMA state that managers can be terminated for any reason at any time, but Reidy explains that the review process does not differ from that of any normal pension fund: “The way we look at it is that this is a long-term fund and has to have a long-term view.”
Should managers underperform, Reidy says the NTMA will look at aspects such as style bias against the benchmark and decide whether it is happy to sit with the performance over a period of time. However, on confidence issues such as staff departures, she notes that the agency would be more inclined to terminate a contract if circumstances were not sufficiently resolved.
As part of the ongoing manager evaluation process, houses have to present themselves twice a year to the NTMA in Dublin. They will also have to meet with the commission.
In addition, the NTMA has to carry out a further site visit to managers every 18 months to check it is still happy with arrangements.
However, there is still work to be done on investing the first tranche of assets, as Reidy points out: “We are still not fully invested and with markets going the way they are at the moment, I am not sure when the remaining transitions will be made.”
With the fund’s strong cash flow (annual contributions will be equivalent to 1% of Ireland’s GNP), Reidy explains that the commission is still looking at additional asset classes, able, as it is, to invest in the full gamut of investment vehicles to compliment its core investments.
“We wanted the first stage of the manager funding to be in easily fillable plain vanilla and government mandates. The idea then is to diversify at the edges. For this we commissioned our first strategy report to look at other asset classes.”
Consultant Mercer was asked to look at non-government bonds, emerging markets, small caps, private equity/venture capital, hedge funds and real estate.
At a meeting in May this year, the commissioners decided which of these asset classes would be taken forward first. “In the end they decided to look at three of them. As a result, we are now looking at non-government bonds, real estate and, to a lesser extent, small caps – although there is still something of a questionmark over small caps. This doesn’t mean that any decision has been taken not to invest in the other asset classes, though.”
Reidy explains that the NTMA now has to go back and take a look at the efficient investment frontier using these three asset classes and discuss which vehicles are available to invest in.
She gives one example as the discussion on whether real estate will be made through direct or indirect investment. “We are now at the drawing board and have to say what these mandates should look like and present them to the commission later this year.
“They may or may not ratify the proposals then. But if they do then we will know what we are shopping for in the market and will again place the mandates in the OJEC journal.”
With something approaching a sigh of relief, Reidy says the agency doesn’t expect as many expressions of interest in the more specialist asset classes as it received in the first round of appointments.
The smaller number of players, she says, also means that the NTMA may not use an electronic tender system this time round, although she notes that no decision has yet been taken.
In terms of additional services, the NTMA has also been given a mandate by the commissioners to appoint a commission recapture provider. The fund already runs a stock lending programme through its custodian.
“We are in the process at the moment of deciding whether or not this mandate will be subject to the EU or Irish tender directives, or whether it is considered as brokerage services, which would mean that it is not subject to either directive.
“As far as I am aware though there are basically only three providers in the market.”
Furthermore, the fund is also looking at best execution monitoring and has a mandate to select a best execution provider, which Reidy says it will be doing very soon.
“The commission has also asked us to keep it informed of how our cost overheads compare to other funds and we are at the moment looking to contract a firm to do that.”
The work goes on then, albeit with the lion’s share of one of the world’s largest investment tenders mostly under wraps.
Reidy ends by reflecting on what she considers to be some of the achievements of the NTMA RFP
“One thing that pleased me was to see that the recent Norges Bank electronic tender system was so similar to that which we had set up for this fund through IPE-Quest. The on-line system was one of the easiest parts of this whole project.”
Another highly satisfying point, she says, is the interest that has come from overseas, both in the principle of the fund itself and the work that has been carried out by the NTMA in such a short space of time.
“Representatives from various governments have been in to talk to us about the fund and get information on the background and set up, because this type of fund will be a very important model in the future.”