After the roller coaster ride of the past three years, pension plans are starting to ask questions about their methods for selecting and evaluating investment managers and how to allocate their management budgets, says Rob Boston, partner and leader of the asset consulting practice with Morneau Shepell.
Boston, speaking at a seminar discussing the firm’s 2010 Review of Pension Fund Managers’ Performance, says the market recovery we’ve seen over the past year has allowed clients to move from a position of caution to one of reflection. “They’re going back to their blueprint, their SIPP [statement of investment policies and procedures], and saying ‘is this relevant right now?’”
He says that for plans to formulate an effective investment strategy that reflects their unique needs, they need to be able to ask these questions and get answers.
When Morneau Shepell is approached by a client seeking a plan review, says Boston, the first thing the company does is look at the client’s asset class structure, and how this has affected manager selection. He says the industry went through a period where money managers were defined by style and cap size, and portfolios were constructed including several money managers with different styles.
“I think perhaps we’ve come through that, and there’s a different way of thinking now in terms of manager selection and the types of mandates that we give these managers,” he says.
According to Boston, pension plans are also wondering if their plans are benefitting from active management. He says that while active management is sometimes a benefit, this is not always the case. Even in cases where plans are clearly benefitting from active management, he says it’s important to look deeper and determine exactly which asset classes are receiving benefit, since this is rarely the case across the board.
Boston says passive management makes sense in some cases. “Obviously, that would be in areas where it’s a truly liquid, highly efficient market where managers tend to have a difficult time outperforming on a net-of-fees basis.”
In addition, he says, passive management makes sense for plans with a limited active-risk budget. “You may want to put your active-risk budget in an area where you get the biggest bang for your buck. To put a great deal of active risk into an area where the manager has a difficult time meeting the passive index means that you’re kind of blowing your money in a market where you could be better served.”
Boston says another question now commonly being considered by plans in review is whether an asset mix should change over time, in keeping with the plan’s funded status. “It used to be that pension plans would invest 60/40 and would just let it ride, and try to find really good managers [for each asset class]. There’s a change going on where, as funds get better funded and as we produce surpluses and get to points above 100%, people are locking in some of those returns and taking risk off the table so they can get a more consistent set of returns.”
While Boston says it is important for plans to ask these questions in a review in order to ensure their pension is on the proper track, he suggests larger plans should consider conducting more frequent reviews.
“I’m quite surprised at the frequency of reviews on some plans that are of a fairly significant size. It’s our common practice to do reviews on a quarterly basis, and to be monitoring managers on a continual basis,” he says.
In contrast, Boston says it’s not uncommon to see large pension plans in Canada conduct reviews only on an annual basis, a phenomenon he attributes to large Canadian plans lacking the same resources for monitoring and reviewing as similar sized plans in the U.S.
Read Morneau Shepell’s 2010 Review of Pension Fund Managers’ Performance report.