Have you seen an increase in manager search activity?
Bélanger: We have been told by some managers and consultants that there has been an increase in manager searches. For us, it’s been business as usual.
Arnold: We haven’t seen an increase, but we have seen a marked increase in the level of sponsors understanding what they are investing in and how it fits in their programs. This is particularly apparent in the alternatives space but also applies to traditional assets. No doubt, part of the heightened scrutiny is related to the downside factors associated with the complicated nature of alternatives, but this level of rigour is also helpful in conducting due diligence on traditional assets.
Chiappinelli: The more interesting phenomenon occurring is not the quantity but the tone and tenor of the types of searches we are seeing. The world is shifting from a vendor relationship (Can I buy a global equity product from you?) to a strategic partnership model (I have a problem. How can you help me?). This new model does not fit nicely in the long-established mode of hire a consultant, create a long list, winnow it to a short list, do the finals, then fund a mandate. Instead, plan sponsors are identifying key firms that have multiple strategies under one roof (or access to multiple strategies) and then giving them wider latitude to create specific solutions for them. The types of solutions can range from dynamic asset allocation to inflation-beating strategies, etc.
Winch: In the second half of 2008 and the first half of 2009, most plan sponsors focused on the viability of their plan and their business. Replacing or adding new managers was not a focus. As the economy has stabilized, we have seen an increase in activity. Part of this activity relates to evaluating the stability of the current manager as well as consolidating the number of managers within the plan sponsor’s program. Manager oversight is now a keen focus for both the consultant and the client and, as a result, due diligence is now being placed at this level.
Chepelsky: Not really. It seems plan sponsors are apprehensive in making any knee-jerk changes to their investment managers due to their 2008 and early 2009 performances. Sponsors want to see if their managers stay true to their convictions. If they underperformed in 2008, they want to give them a chance to outperform as the equity markets rebound. If managers underperform in 2008 and 2009, sponsors will most likely start making changes.
Jiwani: Investment management firms were not immune from the massive reductions in workforces that were taking place, and some chose to reduce their investment management teams at a time when one could argue that investment research was needed most. These three qualitative factors—issues with investment processes, organizational structure and changes in investment personnel—when combined with poor relative performance, led to an increase in manager searches over the last year.
The recent dislocations we’ve experienced in the market can be viewed as an extreme stress test of investment managers’ process and risk controls, which would be very difficult to actually simulate with some sort of model. This stress test exposed anyone who had poor risk controls or questionable processes.
In addition, some firms were thrust into situations that were unprecedented, and they had to restructure their organizations. These restructurings came in the form of a change in organizational structure. In some cases, this had a net positive impact, whereas others were impacted negatively by these changes. Investment management firms were not immune from the massive reductions in workforces that were taking place, and some chose to reduce their investment management teams, in a time when one could argue that investment research was needed most. These three qualitative factors—issues with investment processes, organizational structure and changes in investment personnel—when combined with poor relative performance, led to an increase in manager searches over the last year.
Bélanger: We have been told by some managers and consultants that there has been an increase in manager searches. For us, it’s been business as usual; there was no change in the number of manager searches as a result of the current environment.
Has a renewed focus on risk management changed the investing behaviours of plan sponsors?
Chiappinelli: A typical plan sponsor due diligence trip usually had the risk management guys at the end of the day, and they were the first to be dropped if we ran out of time. No longer. Risk management is now centre stage in any due diligence trip. Plan sponsors want to see and touch the people, the systems and the type of stress-testing tools that sophisticated managers have at their disposal.
Winch: Yes, clients are very much focused on risk management. The larger plans are beefing up their own internal risk management teams while other plans are spending considerably more time on the subject of risk budgeting and exploring what they can do versus what they can afford to do.
