What causes an investment manager to get the call from a pension fund that its services are no longer needed? Media reports, routinely citing ‘performance’ as the sole factor responsible, pose a conundrum for specialists in client retention matters.
For other business-to-business services aimed at pension funds, such as law firms and data vendors, there are no fewer than 17 factors to describe why they get cancelled. Generally there are between two and five of these 17 factors involved in any given story of service switching.
Is the pensions industry really so different, and so unforgiving of underperformance? To gain a fuller picture of the major factors at work we spoke face to face with several pensions directors, including large corporate funds and local authorities, and we asked them the following question.
“Think about the last time you switched managers: can you describe the events and factors which contributed to your decision to switch?”
The results were fascinating and there were several aspects to their switching stories that surprised us. In order of importance, these were the six factors that emerged from those we interviewed:
q failed explanations for underperformance
q acquisitions/changed team or processes
q star performers leave
q communication failure
q sustained underperformance
q reviews, presentations and failed service encounters

Failed explanations for underperformance
The most common situation was ‘underperformance’ acting as the trigger for a meeting with trustees, followed by a manager’s failure to explain it. These cases show how the ‘performance’ given at the presentation is the really crucial factor.

Underperformance and failed service encounter The European portfolio had seriously underperformed and the scheme trustees called in the investment firm to explain what had gone wrong. Unfortunately the main relationship manager was on holiday and the firm sent along a deputy who could only talk about UK equities (which had done fine). When trustees fired off some questions the manager was exposed and even seemed affronted at being tackled on issues outside his control.
Underperformance and failure to explain A meeting with a fund manager turned dark when he admitted that he didn’t know what had gone wrong, then added, with fatal consequences: ‘Don’t blame me, it’s the markets’. Shirking responsibility never plays well it seems.

Underperformance and apology An active UK mandate had suffered two very poor quarters and the manager was called in to explain. The trustees found the manager ‘ridiculously apologetic’ and immediately lost confidence. They had expected and needed the manager to acknowledge the underperformance, explain, stand firm, and reinforce the strategy. What they got was something closer to normal recovery procedure we have found in almost any other b2b scenario, where the client responds well to an acknowledgement, apology, fault repair and token compensation.

Underperformance and successful recovery Highly concerned, a pension fund called in their manager to explain a refusal to invest in equities at the very height of the boom. Even though the relative performance
had suffered, the explanations made
a great deal of sense. The company presented with confidence, it
was convincing and it was sticking with its philosophy and an underlying model that would prove to be correct in time. The company retained the mandate.

Dead and alive It is very difficult to get a trustee body to reappoint a fund manager once it has been fired –
once trust breaks down it seems irrevocable. One exception to this was a case where a new CIO joined the ousted manager, a respected industry player. Trust was rebuilt on his reputation alone and the business was
won back.

Acquisitions/changed team or processes
Performance unchanged but manager taken over A UK manager was acquired by a large European firm and the trustees sensed danger and instability centring on staff turnover, new investment philosophies, new management, and an overall feeling that the UK operation would be marginalised under the new regime.
The scheme’s philosophy in this example was uncompromising: “You should fire a manager as soon as you find out about an acquisition. If you let them come in and present they will win you over, but the likelihood is that your investments will underperform in spite of their promises.”
Star performers leave/join
Team of four poached by a competitor An investment committee had an emergency meeting soon after news of a mass departure from its main investment manager, with a severe impact on the portfolio. The fund manager was replaced within the month, since they believed the turnover of star performers is a leading indicator that there will be poor performance three to five years on. “When a respected team is poached by a rival, or there is a wholesale clearout following an acquisition, you find yourself with a completely different universe of managers and a new strategy.”

Bringing a star performer into a team environment A UK mandate was upset when a star performer joined a fund manager and changed the shape and direction of the team. The star’s ideas became too dominant, and the more mediocre yet consistent performers were forced out. The pension fund strongly felt these individuals would have stuck to the mandate better.

Communication failure
Underperformance and communication failure The head of Far East equities had left the manager, but the pension fund director had not been informed.
He was somewhat embarrassed when the trustees discovered the news by accident at a meeting. Enquiring why a portfolio had underperformed, they were there were informed of the departure of the fund manager by their relationship manager who breezily said: ‘Don’t worry, it won’t happen again, we replaced him a couple of months ago’.

Sustained underperformance
This is the category that triggers a switch to another manager, but pension funds and their trustees appear to be surprisingly forgiving when cogent arguments are offered. One explanation for this is that switching costs and the risks of compounding the underperformance are high; pension funds do not wish to switch managers unless they are left with no option.

Reviews, presentations and failed service encounters
Overselling at beauty parades Overselling was the undoing of an otherwise winning pitch by a manager who was attempting to retain a mandate, as reported by one pensions director who said: “If one of the
firms says they can outperform
by 2% and another says 0.5%, I’ll go with the one predicting 0.5%. It fits with my strategy and is more credible and realistic.”

Poor preparation (where’s the room?) One pensions director got a bad impression when visiting a manager She was shown into one room (too cold), then another (broken projector), and then another where people shuffled in late. She told us that presentations are “all a bit of a charade, but if you play the game well you can impress. A lot of it comes down to how you are met – is the person on time, confident and professional?”

Differentiating and losing One presenter blew his firm’s chances of impressing some new trustees by trying to be different. He had resorted to telling a joke as an ice-breaker in order to differentiate his presentation, but it fell flat and he never recovered.

PowerPoint problems A presenter for an incumbent manager jumped about from front to middle to end, making the PowerPoint presentation impossible to follow. In addition he was incorrectly briefed about the audience and had pitched the information at the wrong level.

Complacency An incumbent manager, underestimating the audience at a presentation, sank when faced with tough questions from trustees. The pensions director remarked: “He just expected to retain our business, and although we only needed a competent performance, he clearly hadn’t done his homework. You have to treat every pitch as if it is new business.”

Pension funds and their trustees, far from being trigger happy regarding managers when performance dips, are really most forgiving. After all, the switching costs and risks of moving money elsewhere are daunting.
Performance in a presentational sense, however, was found to be the critical success factor.
How well can the manager accept responsibility and explain investment underperformance to directors and trustees? How confidently will he or she stand by the strategy following poor results; and how well can the manager judge the level of the audience to communicate the message? Crucially, apologies have no place – they carry both an admission of failure and a false expectation of redress.
Acquisitions, star performers leaving and team changes at the manager create uncertainty and force reviews; here again, the trustees and investment committees need to feel safe. The winners are always those managers who can present best in defence, leveraging their relationship skills to inspire confidence and peace of mind.
Ian Mackechnie and Graham Wethered are with Client Mind, based in the UK