Selecting investment managers online
It has become more difficult to select investment managers in recent years because there are many more players than there used to be, there is much more specialisation among the managers, and there is a greater demand for transparency and due diligence, says Felix Kottmann, founder of Zurich-based consultancy Kottmann Advisory.
Kottmann advocates a three stage process. First, the pension fund should draw up a profile of the kind of investment manager it is looking for - what kind of skills, style (if there is any preference) and so on. This should be done before the search begins, not during the process because that will waste time. Next, the fund should decide whether to go it alone or to use a consultancy. “It is always better to have more than one pair of eyes,” he says. And finally, the fund should make sure that the universe of managers it is screening is as wide as possible.
Tony Hay, sales director at Investment & Pensions Europe which operates the online investment manager search service called IPE-Quest, agrees with the final point. “Whatever type of institutional investor label you wear – pension fund, consultant, insurance company, etc, – one of the first questions at the start of the search for an asset manager is do I know all the managers who manage this asset class or might I be missing a candidate?” he says. “In the current climate of declining markets and increasing fiduciary responsibility this question is even more important. So the person who creates the initial long list has a major responsibility to include as many managers as possible.”
Online services can help in identifying the universe of managers from which the final selection will be made, says Kottmann. The most obvious form of service is a database of managers, with details on their size, performance, approach and so on. In Europe, a leading independent online database is Asset Manager Information (AMI), run by Russell/Mellon CAPS.
“AMI is a web-based repository for institutional money manager data from around the world,” says Paul Carter, global product manager for AMI. “It simplifies the exchange of investment data between managers and consultants, and is designed to drastically reduce the effort, time and cost required to collect and distribute factual firm and product information.”
Asset managers, of which there are around 100 on the database at present, pay a fee to register on a sliding scale according to how much information they want to present. They are able to amend and add to their information at any time. Users are mostly consultants and multi-managers, who number 30 so far, although it is also suitable for larger pension funds that appoint their own asset managers, says the company. The users also pay a fee for access, which enables them to search the database in a variety of ways, including by product type, performance, style and investment philosophy.
Last year, Russell/ Mellon CAPS acquired a Europe-oriented database called managerselection.com and is in the process of merging it with the UK-oriented information in AMI. The company is also adding data on US managers from its US operation and says that it eventually plans to have a global database with around 1,000 registered asset managers.
Set up in mid-1999 after consultation with the industry, IPE-Quest differs from AMI and other services in that it is the institutional invest-ors or their consultants who register their information, in the form an anonymous “quest” setting out their requirements, rather than the investment managers. Over 700 registered asset managers are notified that the quest is on the system and are able to review it and, where they are qualified to manage the mandates, they are able to make an application, which costs E70.
IPE-Quest collects the asset managers’ application forms and forwards them to the relevant institutional investor in a spreadsheet format. The institutional investor is then able to examine the data and can choose whether they wish to approach a particular asset manager. Only at this point will an asset manager discover who the institution is. Otherwise the institutional investor’s identity remains confidential throughout the whole process.
“The key to IPE-Quest is that it offers consultants and institutional investors the opportunity to enhance their long list at the start of the search,” says Hay.
There are also several online services based in the US and focused on the US market. Based in White Plains, New York, Effron offers a web-based investment manager search and evaluation database called Plan Sponsor Network (PSN) Enterprise, covering 1,200 investment managers. Registration is free for investment managers, while users must pay for the software and service which includes a number of analytical tools, such as the ability to measure performance, beta and tracking error.
Also based in White Plains, New York, is HedgeWorld Markets, a free online service specialising in the hedge fund marketplace. Funds wanting to be listed are screened by a selection committee, and investors wanting to use the service must meet a set of regulatory requirements. The service is global and so far has over 100 hedge funds listed, from single manager to funds of funds.
Pennsylvania-based InvestorForce provides a set of online services that includes a database of around 850 investment managers, mostly US-based, offering over 4,500 products. Most managers volunteer for registration, which is free, although InvestorForce does identify managers it wants on its database and will approach them if they are not registered, says Kristofer Kelleher, marketing manager at InvestorForce. In addition, an online service called Altvest covers hedge funds and their products, and provides quantitative performance and qualitative information on 1,200 funds.
These online services are now used by all parties in the investment process. “We use AMI because it has a lot of useful data on asset managers about assets, performance and so on,” says Jane Welsh, senior investment consultant for global consultancy Watson Wyatt. Patricia Donnelly, head of RFP at BNP Paribas Asset Management, says, “Online services such as IPE-Quest and AMI add to the variety of ways we have always used to get to plan sponsors. There are no bad ways of communicating with plan sponsors – the question is which is the most efficient.”
Gunther Schiendl, head of investment at Vienna-based APK Pensionkasse, used IPE-Quest to run a search for a global active equity manager. “Our aim was to show our search to as many good investment managers as possible,” he says. “We are in regular contact with many investment managers but there is always someone you don’t know about, and they can surface in IPE-Quest.”
But there is a limit to what the services can provide. “We have issues with using a database approach for selecting managers because there is lots of evidence that selecting managers on the basis of past performance, which is what tends to happens when you use a database approach, leads to disappointment,” says Welsh. “We think the only way to improve the odds in your favour is to try to identify skill and you can only really do that by getting to meet the people and identifying what their competitive advantage is.”
Kottmann agrees. The databases and services like IPE-Quest can help reduce the number of candidate managers from 50 to 10, “but once you reach the 10 best suited candidates – best with regard to success ratio, style, size, origin and so on – it is almost wholly a qualitative evaluation that you must undertake,” he says. This includes assessing the quality of those in the firm, their philosophy, motivation and so on.
The online services do not aim to replace this kind of personal, qualitative assessment, but can offer a route that gets to this point more quickly and extremely efficiently, by broadly covering the potential universe, he says.