“The key is to institutionalize
best practices. If you don’t
have the right systems in place,
chances increase that things
won’t go well in the future,”
says Steven Moise, New
Mexico’s state investment officer.
with an independent investment advisors ‘to assist with fiduciary
responsibilities.’ The larger the plan, the more likely it is, overall, to
hire external investment advisors to ‘assist with fiduciary responsibility: 48.6% of the smallest plans (with one to 49 participants) hire
such advisors, while 76.2% of the largest advisors (with more than
5,000 plan participants) do so, (see chart, on page 43) the survey found.
Guarding against outside influences nevertheless “is extremely
difficult,” said McCaffrey. One investment committee, he relates,
had to fend off an overstepping patriot who wanted the committee to
channel funds to what he thought was a patriotic investment.
“It comes down to process,” said Lori Lucas, executive vice
From Best-in-Class to One-Stop Shopping
president and defined contribution practice leader at Callan Associ-
ates, a San Francisco-based investment advisory. “You have to have
a sound process in place and you must document it. That invest-
ment policy statement—there are a lot of distractions [in the vetting
process]. Everybody has the glossy brochures, but the investment
policy statement streamlines decision-making.”
The tire-kicking can range “from the analytics to how the
managers source ideas, how they analyze holdings going back in
time, to the team responsible for the research,” says Christopher
E. Vella, CIO of Multi-Manager Solutions at Northern Trust
Asset Management. “What’s the experience of those managers?
How many staff report to the leaders? Can they develop talent? How
many research analysts support the managers? Can you spend time
with the research team and understand the underlying analytics,
and with the compliance team?”
Do you want a collection of boutiques or a department store?
That’s the essence of one high-level decision that will define subsequent due diligence tactics: whether to engage multiple investment
managers or a single large firm. Outsourcing the entire chief investment officer function is a decision on its own plane. But investment
committees with staff CIOs also need to decide if and how to
hand off discrete asset classes and functions to fund managers and
Ryan Lennie, managing director with Wilshire OCIO Solutions in Pittsburgh, said the decision pivots on your fund’s internal
resources for overseeing outsourcers—especially for ensuring
compliance. It takes more time, money, effort, and, probably,
consulting dollars to assemble a balanced market basket of specialty
managers. Ongoing, it’s also more tedious and expensive to reconcile all of their reports.
A firm offers a single point of contact; consistent reports; and,
likely, the talent to ensure consistent operations. But a single OCIO
may also manage primarily proprietary portfolios, requiring
clients to buy additional services across the entire spectrum of the
One way to create a more apples-to-apples comparison is to
benchmark each asset class separately, said Lennie, forcing each unit
segment within a large OCIO to win on its own merits. If the firm’s
individual managers can hold their own against specialty funds, effi-ciencies of scale might decide the issue.
Fund Manager Checklist
With hundreds of new funds introduced each year, managers
are selling themselves as much as they are their concepts,
track records and teams. Ask these questions to quickly size
up a fund manager’s personal track record.
3 How long have you been managing this fund?
3 How long have you been managing this type of fund?
3 If the fund is new, how long have you, yourself, been directly
responsible for a fund?
3 If your immediate past job was with a large firm, what were
the results of the funds that you, yourself, directly managed?
3 Does your contract include fiduciary responsibility?
3 What bonding, insurance and indemnifications are included
in your contract?
3 How do you ensure ongoing compliance?
3 How do you handle client disputes?
3 What is the compensation structure of your staff?
3 What specific behaviors and results does your firm reward?
ON THE JOB
It’s also simpler to communicate with a single firm as your
fund’s investment strategy evolves, rather than trying to keep a
basket of specialty firms on the same ever-changing page, Lennie
added. “It’s easier when you have one firm overseeing the entire
portfolio. They can understand from the top down your objectives
and implement that all the way through,” he said. Juggling communication and strategies among outsourcers can trigger trips among
all, he said. “It becomes more complicated if we’re talking about
this strategy but I’m only managing 20% of your portfolio. At that
point, the outsourcer is relying on the client” for clear and consistent communication and to ensure that all of the moving parts of
the investment plan are in sync.
Rights and References
Every asset manager and consulting firm has a story to tell; it’s up to
the investment committee to sort hard facts from hyperbole. References, almost by definition, are cherrypicked. Seasoned CIOs, asset
managers and consultants recommend these tactics for detecting the