On the Record: How do you ensure successful manager selection?
Sparinstitutens Pensionskassa (SPK)
Peter Hansson, CEO
• Location: Stockholm
• Assets: SEK26.2bn (€2.6bn)
• Members: 39,000
• Second-pillar defined benefit (DB) pension fund for the Swedish banking sector
As a pension fund and asset owner, we are overwhelmed with information from firms that want to sell us their services and products, even if they do not fit within our portfolio. At the same time, we do not necessarily have the resources to give everyone time and space to explain their offering. Therefore, we want to limit the contacts we have with prospective asset managers and we want the relationship to be on our terms. This means we need to be open with the asset management community and to communicate clearly what we want. In order to achieve this, we created a tool on our website that consists of a simplified request for proposals (RFP) form.
Managers can access the website and see immediately what services and products we are looking for. Whoever gets in touch is redirected to the website. There they can check whether their offering meets our current requirements and provide information on their services. Once the online form has been completed, our office goes through it and can guarantee that the managers will get an answer within a month. We have hired specialists who focus on manager selection and evaluate the proposals we receive.
This way, we spend time on investment ideas that we think are important and prospective managers also optimise their time.
One important aspect of the process is that we ask for data on returns and fees at the beginning, rather than the end, because we definitely do not want to spend time with managers that do not meet our requirements in those areas.
It is a simple idea but it is already yielding results. We started this initiative in the first quarter of 2016 and we now get one or two proposals a week. At the moment we are in the process of finalising four mandates that were generated by the platform. We expect all or most of future mandates to be generated by proposals through the platform.
One thing we might miss through the process is the ability to find new ideas that we had not thought of ourselves. To avoid that, we make sure we spend time with our peers and exchange ideas and thoughts. We also look at databases of managers, but the focus of our manager search activity will be on the proposals we get through the website.
At the moment we have around 60 mandates and are building a ‘bench’ of managers that will stand by and replace current ones if they underperform.
Alan Flynn, Trustee board member
• Location: Dublin
• Assets: €254m
• Liabilities: €277m
• Corporate DB pension fund
In my experience, one of the first things to say about manager selection is that the size of the manager is not necessarily a good guide to how successful a manager will be. Sometimes, particularly if as a pension fund you operate out of a peripheral country, you tend to see only the largest managers. They may point out their AUM and size of their organisations as strengths. But size isn’t everything. What is far more important is the level of service that you are going to get as an investor. What I am looking for in a manager, along with the quality of the advice, is attentiveness to service. I sometimes find that, particularly when it comes to larger asset management organisations, if you are down the pension fund food chain, and your manager is dealing with much larger pension funds, the levels of service to you can be poor.
For instance, getting a clear explanation of why, as pension funds, we get a particular investment result is equally important as the results themselves.
From that perspective, a good approach in selecting managers is to see how easy it is to speak to senior people in the asset management organisation. It is important to speak to the people who make the decisions, rather than just the ones who ‘sell’ the decisions. I find that the former are far more willing to discuss possible changes to their strategy.
Another important step in manager selection is reaching a broad consensus in the trustee board. Everyone needs to know what the issues are, from the liability profile to the deficit, and to broadly agree on the objectives. It is also important to agree on the strategy to solve the issues, which is easier said than done.
On the other hand, trustee boards sometimes have to work with what they have; there may be an adviser that brings a list of managers, or a number of managers that the board is used to working with. You rarely start with a blank page. In general, however, I prefer to start with an initial selection period based on a beauty parade. This is where we will rate the managers on a number of things, not just past performance. We will also try to find out who would be looking after the pension scheme.
I find that a successful manager selection process is usually one that has not been interfered with, by the adviser or other figures who may have vested interests.
Advocates Pension Fund
Maria Charalambous, General manager
• Location: Nicosia
• Assets: €55m
• Members: 3,500
• DB pension fund for Cypriot practising lawyers
Being a small pension fund, we only recently decided to hire two investment managers to implement our new asset allocation. Until recently, we invested mainly in cash, plus some stocks. The ALM study completed this year showed us we needed to broaden the portfolio. In hiring the first two managers for our portfolio, we relied a lot on the opinion of our adviser. However, we followed a hiring process that is based on best international practice. We created a request for proposals (RFP) that was published in a local newspaper. In the RFP, we asked for detailed information on the asset managers’ portfolio, their staff and their clients. Furthermore, we wanted a description of their investment philosophy, as well as details on their risk management process. We also asked them to state their competitive advantage and, last but not least, we asked questions about fees.
Although all aspects of the managers’ businesses are important, we emphasised staff. We tried to get information on the current and past experience of the staff that would be handling our account. Another important aspect of the RFP was information on other mandates. We wanted examples of how the managers worked in situations similar to ours.
We mainly got responses from regional asset managers that work with international partners.
The final stages of the process included the evaluation of all the proposals with the help of our investment adviser and the interviews, which were a major step. We believe it is very important for the committee to feel confident about the asset manager in an interview setting. There needs to be a chemistry between the committee and the asset management team.
To score the managers, the proposals were then divided into sections and each section was assigned a percentage. We gave the highest weight (max 20%) to the interview. This is because the committee has limited experience in selecting asset managers.
The two managers that won the mandate scored highest in the interview and the other sections. They convinced the trustees that they could trust them. To decide whether this selection process works, we will need to see the actual results the managers deliver, and how they will handle various situations. If we are not satisfied with the numbers, we will need to reconsider the selection process.
Interviews conducted by Carlo Svaluto M