For pension funds and asset managers alike, manager selection has long been a costly and time-consuming process. Can the new technology of the internet make life easier for the parties involved in the procedure? Certainly electronic services speed transmission of information, but some believe initial ideas about what the internet can facilitate were too optimistic.
In the US, investment data group InvestorForce reports rapid growth in the popularity of its ‘manager search’ online tool.
Technology can make the manager search and selection process much more efficient, says James Morrissey, the company’s president and CEO. “Our platform for consultants or plan sponsors provides tremendous efficiencies in the whole process of search and selection,” he says. “We’ve seen high growth in terms of those players leveraging the internet in the search process.”
In the whole of 2001, the service launched around 50 searches for $10bn (E11.4bn) of mandates, says Morrissey. But in January of this year alone, InvestorForce did 27 searches for $2.1bn of mandates. InvestorForce did have a distribution office in Europe, but has focussed its sales on the US only.
Among the main European players in the online management selection marketplace are – a database service owned by Swiss consultancy Complementa, and IPE-Quest which is owned by Investment & Pensions Europe.
Increasingly, pensions consultants are using the internet and other electronic means to collect their own manager research data, and Russell Mellon CAPS produces a database which consultants can subscribe to.
Asset managers in particular, appreciate the benefits offered by the internet in the selection process. Back in the days when each manager search meant a lengthy Request For Prosposal (RFP) to be completed by each asset manager, management firms were spending precious hours filling in around 30 of these every week.
But the advent of databases containing asset manager information for use by consultants or end-user institutional investors has reduced the amount of time managers have to spend on this. However, even now, many investment managers complain that there are still too many endpoints for the information. The number of databases could be reduced, they say.
CAPS, which was taken over by Russell/Mellon Analytical Services late last year, has an on-line database of asset manager information called AMI. This includes firm and product-level information and is used by investment consultants to collect the primary data they need for asset manager research and manager monitoring. It generates revenue from managers who pay to include their data and consultants who pay to use it. AMI took shape in February last year, and was built on CAPS’ Inform product which it says was a brand leader for UK consultants.
Russell/Mellon CAPS says AMI is already very comprehensive for UK data, and its coverage of the US and Europe is growing. The company has big plans for the database. Paul Carter, AMI product development manager at Russell/ Mellon CAPS says: “Our aim is to provide consultants globally with the asset manager data they need for their search and selection activity.”
So, even though databases for collective use are available, most consultants choose to have their own information collection system as well.
Consultancy William M Mercer launched its Global Investment Manager Database (GIMD) in January 2000 as a replacement for the collection of databases it used up until then. GIMD takes the form of an online questionnaire which managers complete. In this way, the technology of the internet has proved valuable for the consultants at Mercer. “We never need to ask for the same information twice,” says Bill Muysken, global head of manager research at the consultancy.
At the moment, Mercer has no plans to sell access to the database to other parties. But Muysken says the firm is keeping its options open to that opportunity. Last year, Mercer and Frank Russell announced that they intended to collaborate on the creation of a global data warehouse. This would be a centralised, web-based repository for institutional investment manager data from around the world, they said. They added, at the same time the system would use Mercer’s GIMD as its core until data management experts at Russell/Mellon developed a new system.
Other consultants use the internet less. Watson Wyatt, for example, says although it has client extranets which assist in the management selection process, the firm doesn’t use the internet for this.
None of the online manager search services available is so bold as to suggest it takes away the need for a consultant. “It is an enabler,” says Jim Morrissey of InvestorForce, “but it doesn’t replace a consultant’s day-to-day interaction with their client.”
But using these services can perhaps turn up additional options in the manager marketplace. One consultant says that even though large consultancies do widescale manager research, in practice as individuals they tend to have around six preferred managers which they will advocate.
Felix Kottmann of consultants Kottmann Advisory in Zurich says he believes a fee-based search solution, such as that offered by IPE-Quest, should be used in every manager selection project. In a recent IPE-Quest search he did on behalf of his client SwissAir for five mandates, responses came in from 120 asset management companies.
Even if your shortlist is only going to consist of five managers, if you miss several managers out of the initial search, you could end up ignoring three which would have made it to your final list, says Tony Hay of IPE Quest. “The more you improve the final shortlist, the better the chance that whoever you choose will be the best for the job,” says Hay.
Paul Carter of Russell/Mellon CAPS says that most consultants run their own databases of asset manager information. These usually include qualitative and quantitative data and buy/hold ratings of the managers they watch. Consultants find products like AMI especially useful to populate the quantitative data they store such as performance history or assets under management.
A product such as IPE-Quest, he says, offers a basic level of information for the search and selection process. Investment consultants add value in the search and selection process by researching a manager thoroughly, looking closely at people, processes and philosophy behind the statistics. AMI provides consultants with a lot of the background information they need to prepare for their manager research visits.
But Tony Hay of IPE-Quest says the advantage of IPE-Quest was never supposed to be in its comprehensiveness. On the contrary, the service positions itself as a billboard for mandates to be advertised, on the assumption that it is a near impossible task to make any databases really accurate and current.
He says: “We come at it from a different angle. We don’t believe all these databases are truly global. When you look at these products… there are different sets of data missing at all levels.”
IPE-Quest is a search service that allows investors to add names to their long list at the start of the search. The service asks 20 questions which are passed to the investor in spreadsheet format. They can then review replies and decide whether or not to add any of the managers to their broad list of candidates who will receive a full RFP.
Each asset manager is charged E75 per reply, but there are no other charges. The service was set up in July 1999, and has since created a customised site for Norges Bank which enables the investor to collect data.
“I would say all the internet-based manager search sites have hardly scratched the surface in terms of the number of mandates that are out there,” Hay says. “I think there’s a long way to go until online manager selection services can claim to have cornered a significant part of the market.”
Martin Oester of Swiss pension fund Ascoop says both IPE-Quest and are good tools for pre-selection and market research. “They’re useful to see who’s out there and who has the skills,” he says. “But in the end, to make a final decision, you have to have direct contact.”
Pension funds say the worry with search and select databases is the quality of the information given. It has to be taken on trust that the information is up to date and comprehensive. But given that keeping such a broad database current and correct is a constant battle, there is a fear among clients of these services that the information is imperfect.
Apart from increased efficiency, using the internet in manager selection has the advantage of potentially broadening the initial pool of investment managers.
“The internet is a very nice tool, and is probably going to increase the competition,” says Oester. “I assume the small players in the market will get an opportunity to compete against the bigger players, without having to have large marketing operations and sales forces,” he says.
But in the UK, at least, some data specialists believe there is no role for search and selection services. Manager selection business has historically been placed with consultants, and there is no reason why this will change, one industry participant says. The problem for search and select services is the lack of advice, she says.
Trustees of pension funds in the UK have a fiduciary duty to get the best advice, and consultants are chosen in more than 90% of cases.
Even though using an internet search and select service could potentially save money, she says no trustee is likely to choose this economy at the expense of receiving good advice.
But, the internet services do not claim that they negate the need for personal contact and advice in the process of picking investment specialists.
“I do think that the internet is a good medium for screening the asset managers and getting to the stage of inviting them to a beauty parade,” says Michael Brandenberger, chairman of manager
Manager search services are not a comprehensive solution to the management selection process, but they can at least cut down the work involved on both sides.
A good database can enable pension funds to issue shorter RFPs to managers, even if it does not reduce the number of RFPs they send out. For example, if there are 80 common questions to be asked of managers, there may be just 10 or 20 of those which are specific to your search.
While some of the US search sites charge users of their services through commission as a percentage of the mandate, Brandenberger says charges fees to investors only. There is no charge for asset managers inputting their data.
And this database service has had some success. Since it was launched in December 2000, it has dealt with SFr2bn (E0bn) of awarded mandates. But Brandenberger adds: “It has been a little less successful than we had hoped.”
Why? “The adoption by consultants other than Complementa has been slower than we had hoped… some consultants believe their own databases are the best,” he explains.
The internet is constantly evolving and new technologies are expected to iron out some of the problems it encounters now. Some database firms report that the internet is good for data collection, but still relatively slow in terms of data distribution.
Jane Ambachtsheer, senior consultant at Mercer, says the internet and related technologies are extremely useful in the manager selection process. But early hopes about what the internet could achieve ran too high.
“There are a number of commercial providers who can gather information and even do online RFPs,” she says. “We’re able to provide that through specific client extranets. Certainly, the technology can cut out the work and can increase efficiencies, but at the same time it is not a replacement for due diligence.
“If you collect information on the internet, it doesn’t mean that it’s correct or that it doesn’t still need to be analysed,” she adds. “Doing an online manager selection doesn’t let you get away with not doing the work”.
“Across industries, investment in the internet was optimistic,” She says. There was a tendency to believe – erroneously – that technological applications were more than facilitators – that they were value adders.
Certainly, the number of players in the market means the information is replicated several times. But as with many marketplaces in the field of information technology, this market is still developing.
Already, the number of database endpoints they service is a big issue for asset managers. Increasingly, industry participants say, managers will look very carefully at which databases they choose to populate.
“I think in the long run, there will probably be one or two internet-based databases which split up the market,” says Brandenberger of complements. A tough battle for new entrants to the online manager search market is gaining acceptance among asset managers, he says.
Muysken agrees. “The asset managers I talk to say there are too many (databases). In the long run, it’s inevitable there will be some consolidation.”
Each of the different types of database in existence has its raison d’etre, and whether one will emerge as the overall winner – and which one this would be – remains to be seen.