Mercer calls for earlier selection input
EUROPE - Pension funds seeking real estate fund managers need to get involved in selection process discussions at an earlier stage because the bespoke nature of mandates is becoming more complicated, according to consultants Mercer.
Greg Wright, principal at Mercer Investment Consulting, said pension fund executives need to get more involved in three-way discussions between fund officials, real estate asset managers and consultants in the manager search phase because a rise in tailored specifications is making it increasingly difficult to select appropriate managers.
Wright first aired his request for manager engagement at the IPE Real Estate Investor Forum in Amsterdam last week.
He suggested real estate mandates, in particular, need further input from pension fund managers because they are more likely to carry a higher number of individual benchmark and return specifications than other asset classes.
"In the past, [real estate] mandates have typically been very well-defined, and clients were clear about what they wanted in terms of outperformance specifications to the benchmarks," Wright told IPE today.
"But this is starting to change as pension funds begin to look beyond the domestic [real estate] market because there are different risk return characteristics and clients are asking for very different mandate targets, such as cash plus or inflation plus among other things.
"It is becoming more difficult to find managers to fit the mandates so we need more three-way discussions early on because the demands on mandates are different each time and becoming more differentiated and more bespoke. As mandates become more complicated it is not possible to say whether managers will be able to achieve benchmark+1% unless [pension fund managers] engage in dialogue earlier," he added.
Wright suggests whereas mandates relating to equities and bonds, for example, appear somewhat more standardised, real estate mandates tend to have a higher number of specifications because there are many more options to take when seeking diversification into property.
As a result, it is possible the most appropriate fund managers are being eliminated at an earlier stage because the requirements of the fund are not clear enough to present the best manager for the needs of the fund.
Whereas a fund may initially suggest in its mandate specifications it does not want to invest in anything appearing to be linked to private equity vehicles, Wright cites as an example, an earlier definition process of mandates with potential managers may actually reveal these vehicles are perhaps more suited to the fund.
According to figures presented by Wright, just 3% of its pension fund clients are diversifying their funds into real estate but that rises to 8% when you compare allocation to asset size.
And of the 700 real estate mandates Mercer has assisted with, 100 were generally global in nature and there has been a significant growth in global mandates over the last couple of years as 48 manager searches were specifically for global real estate mandates.