Spreading the load
The first tenders to be put out into the market by the NTMA were those to find the advisers that would help it in the mammoth task of implementing a suitable investment strategy, appointing the requisite investment managers, selecting an appropriate custodian and choosing the best transition manager to bring the assets to market.
Interestingly, the NTMA ended up taking on each of the top four global consultants for the various tasks; a decision it said reflected what it felt were the various strengths of each in the tender.
Mercer won the brief to advise on investment strategy. Watson Wyatt was pulled in for the transition tender. Frank Russell was called upon for its manager selection skill, and Bacon & Woodrow began the search for a fund custodian.
As Michael Robarts, an associate in the investment practice of Hewitt Bacon & Woodrow, explains, the interview process for the consultants was no less thorough than the searches the consultants themselves would be involved in. “One of the interesting things about the tender was that the whole process was done under EU public procurement rules, so it was very thorough.”
Robarts says the firm went through the standard route of responding to the questionnaire and undergoing the interview process before being appointed. And he points out where he believes Bacon & Woodrow’s competitive advantage came to bear in the custody tender. “We majored on the fact that in custody, probably more than for anything else, it is essential to have hands-on experience. We have staff here that have been in that industry as practitioners, and I think that must have played a part in it. You would have been shown up if the knowledge of the firm wasn’t deep enough in custody, because the NTMA knew their stuff!”
Robarts adds where he thinks the presence of the consultant proved of value to the custody appointment: “I think the whole process was interesting because we did spark each other off with ideas. It’s like working with an architect, you get a better model if you challenge them. One example of where we could offer helpful advice was in the custodian responses to the RFP, which traditionally are very bulky. The NTMA had read every single one of them in great detail, but we could offer the benefit of our experience in examining these.”
The next stage, he explains, was the site visits: “This was very interesting because I personally wasn’t sure whether doing a lot of site visits in a very intensive period would just leave people brain-dead. The NTMA knew what they were in for though and I think the interest actually increased as the process continued. What happened was that far from blurring the process, by the time we reached the sixth or seventh custodian we were comparing answers very closely. It required quite a lot of discipline and contemporaneous note-taking, but at the end of the process every person involved had a very clear recollection of how the answers compared. The end result was that we got a unanimous ranking.”
He flags up the importance of such a tight RFP framework: “Under the rules of the tender we could not raise questions with one candidate that were not raised with any other candidate. What this did do was produce a very good audit trail, not just on the decision but on how it was arrived at.”
Addressing the surprise that permeated the markets at the choice of ABN Amro Mellon, Robarts points to the custodian’s particular strengths: “Quite a large factor in their appointment was the kind of reporting that the NTMA was looking for. They are very strong there, and not every custodian puts such a strong emphasis on reporting.
“The decision sent a bit of a shockwave through the industry, but I think the mandate was won by ABN Amro Mellon rather than lost by anyone else.” He also notes that the firm has gone on to win some good subsequent business.
Robarts says a huge factor in being able to reach such a clear custodian decision was that all involved had done their homework. “I think that’s a tremendous tribute to the client.”
While Bacon & Woodrow advised and commented on the questionnaire responses, the firm was not asked to make a recommendation, as Robarts notes: “The majority of the candidates were well capable of doing the job, but the actual decision was the NTMA’s.”
He adds that, while the RFP search was hard work, it was rewarding both for the firm and for him personally: “I learnt from it. Any adviser that says they don’t learn from this kind of thing probably shouldn’t be in the business. We regarded this as a high-profile mandate and we were extremely pleased to win it. The flip side of such a high-profile case is that you don’t want to mess it up!”
Tom Murphy of Mercer in Dublin says the consultant’s first task after being appointed was to help the fund commissioners define the investment objectives and then suggest how these could be implemented to ensure optimisation against the liabilities.
“The big question was how to actually define the fund and include the liability structure in the strategic investment decisions. We then looked at the equity/bond split for the fund, the bond durations that the commissioners might want to consider and the active/passive split for the assets.”
Murphy says Mercer is still actively involved in advising the commissioners on possible allocations to alternative assets, but notes it is ‘too early’ to say what approach might be taken. “We were extremely pleased to be appointed to this mandate.”
Joseph O’Dea, head of the investment practice at Watson Wyatt in Dublin, selected to advise on the transition management appointment, comments: “We were obviously delighted to be part of this process.”
O’Dea says Watson Wyatt researches transition managers in much the same way as it would investment managers. “This is done very much on a qualitative basis and it complemented the very detailed process and attention to detail of the NTMA tender. It was a very structured selection criteria.”
He adds that the consultant was mindful of the fact that the NTMA business wasn’t a standard transition. “It was a transition from cash first of all, rather than a switch from an existing portfolio, so there were elements to consider here.”
While the initial transition process is more or less at an end for the NTMA, O’Dea says a follow-up meeting is in the pipeline to see how the process went
“The NTMA has now completed its strategy, but we plan to meet them to see how it went and whether there were any issues to be considered. This kind of meeting is useful as part of our research also.”