Switching managers: It’s all in the documents

If you’re switching investment managers, you’ll need documentation on the details of the termination. Following are two sample texts that would go into your Statement of Investment Policies and Procedures (SIP&P).

Termination of managers
Pension committees frequently get caught up in the gravitational pull of investments. A good place to outline the reasons supporting the termination of investment managers is in the SIP&P. The SIP&P’s considerations will be aligned with the unique characteristics of the pension plan’s objectives and the basic governance process of the plan (see Figure 1).

Here is sample wording to add to your SIP&P on termination of investment managers.

The committee may terminate an investment manager at its sole discretion and without limitation. In general, the following are grounds for termination subject to a trend analysis by the committee:
  • failure of the manager to meet the performance objectives outlined in the SIP&P;
  • failure of the manager to comply with the SIP&P;
  • change in manager ownership, key analyst or portfolio manager personnel;
  • change in investment style;
  • change in investment management fees; and/or
  • change in the investment structure of the fund.

Such obvious statements are difficult to execute, as many active managers naturally underperform at various points in a market cycle. The reality is that any trade comes with risk: the investment manager’s performance in one cycle might not be indicative of overall performance, which might bounce back later.

Pooled funds
The SIP&P should reflect all key investment decisions the committee makes, including any change in fund structure or managers. The new investment manager will be required to acknowledge receipt of the SIP&P and confirm in writing that it intends to manage the assets under its administration in accordance with the SIP&P.

In the event that the use of a pooled fund conflicts with the SIP&P, there should still be a communications bridge between the SIP&P and the manager using sample wording such as the following:

Pooled funds may be used subject to the approval of the committee. To the extent that the assets of the pension fund are invested in the manager’s pooled funds, the SIP&P is intended to complement the internal pooled/mutual fund policy of the manager with the collective document in compliance with the legal requirements. At times, certain investment constraints and provisions of the SIP&P may be in conflict with the internal pooled/mutual fund policy of the manager. In these cases, the manager is expected to communicate with the committee on when and how the investments of the pooled funds differ from the guidelines outlined in the SIP&P, including an explanation of the perceived risks/benefits to the pension fund of the differences. The committee may then provide appropriate direction to the manager.

Peter C. Arnold is national practice leader, investment and CAP consulting, with Buck Consultants, A Xerox Company. peter.arnold@buckconsultants.com

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