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| ManagerQuest News |
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| The Importance of Consultants |
| Using consultants to give your investment products more visibility. |
Depending on the industry, 55%-80% of all investment manager searches are led by consultants. Looking at this statistic another way, unless an asset manager has visibility with consultants, they can only expect to participate in 20%-45% of the institutional asset manager searches conducted in a given year. |
| If the asset manager's performance is above and beyond the competition, the results may beat those odds. Not surprisingly, though, competition for institutional assets is fierce. |
In the United States alone, there are more Registered Investment Advisors than there are publicly held securities. Pensions and Investments annually lists the top 1,000 asset managers worldwide. Domestically, in the large cap growth universe, Mercer Investment Consulting lists 72 "A" rated managers approved for inclusion in searches for their clients. |
| Working your way into the approved lists for institutional asset manager searches requires a defined strategy for dealing with consultants. |
| Consultants work on behalf of the buyers. The good ones know everything there is to know about the market environment, competitors, pricing, technology, features and the reputations of various providers. Their mission is to match a buyer's needs with what is available among a dizzying array of options. |
Consequently making a favorable impression on a consultant is crucial to winning and keeping business. Making that favorable impression is not hard. The answer is to have the right people on your team who have successfully managed a credible process over a reasonable period of time and to have this accurately registered in the appropriate databases. |
| That's it! |
Consultant databases have quantitative and qualitative aspects. The quantitative information required is straightforward. The challenge to completing the quantitative information is the lack of standardization across the 30+ databases in the United States. Submitting data in various formats can be a tedious, resource consuming but necessary effort. |
Qualitative information is conveyed in writing and in person. Investment philosophy and process narratives need to be submitted to these databases. These brief descriptions of how managers make money for their clients must be compelling and clear. They must also convey what a buyer can expect; in what kinds of markets will the strategy perform well? In what types of markets can the product expect to suffer? How is ownership distributed? What is the succession plan to replace senior employees and partners? And what is the client service philosophy? |
Finally, beyond successfully managing a process and populating databases, creating an impression requires face to face meetings with consultants. Whether it is salespeople, portfolio managers or consultant relations specialists performing this function, someone from your company needs to meet in person with the research teams at consulting firms. The decisions made by consultants are done in much the same way you would select an accountant, neurologist or patent attorney; they look the manager in the eye, listen to their story and decide if it is believable. |
| It is a long process creating a successful investment product and growing - or building - a successful asset management business. Performance and perception in the eyes of the consulting industry are very important aspects of that process. |
| A.S.A.P. Advisor Services can help. Contact us today to find out how we can increase the visibility of your investment products by adding them and managing them in the various money manager databases. |
| Why Disclose? Why Tell? |
| Being prepared with the right answers. |
| In the 1980s when small, intrepid bands of portfolio managers first started venturing out from the safety of large insurance companies and banks started managing money on their own, raw, naked performance was what counted. |
| In the 1990s when the ranks of registered investment firms surpassed the number of listed stocks on the AMEX, marketing and distribution were the keys to success. |
Today, one of the major keys to success in the investment management business is risk management. Wall Street has numerous ways of describing risk. Here are just a few:- Headline Risk: Will my board read something bad about my manager in the paper?
- Tracking Error Risk: How far away from the benchmark can I expect this manager to be?
- Talent Risk: What is the probability that a firm can retain good talent?
- Business Risk: Will the investment manager be around next year?
- Enterprise Risk: Will my company be around next year?
- Concentration Risk: Do I have too much money with this manager or within a given strategy?
- Funding Risk: What is the probability that my defined benefit plan cannot pay my retirees?
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| Consultants and plan sponsors are far more interested in these questions than they are in performance or style. Why? After two decades of comparing and studying performance and style, the tools for analyzing these two aspects of investment management are very well developed. Investors are comfortable that performance numbers claiming GIPS compliance are likely to be accurate. |
| Holdings-based and return-based analytical tools can reveal whether a manager is really a large cap value manager or a large cap core manager. Investors can measure performance and style against a variety of benchmarks using a variety of online tools or with the help of their consultant. |
Currently, traditional institutional asset management firms submit performance and holdings data to as many as 30 different databases without thinking twice. That was not the case 20 years ago. Back then, it was not unusual to find a few portfolio managers who refused to disclose assets under management, holdings and monthly performance because it was too much of a nuisance. In addition, it did not reveal the more important aspects of product and philosophy. |
| Today, we see portfolio managers who are still reluctant to disclose certain types of information. Largely banks or insurance-affiliated organizations are reluctant to release compensation or employment contract information because they think it threatens the compensation structure of the larger firm. |
Hedge funds are fighting transparency - disclosing holdings or portfolio profiles - because they think the edge they are exploiting will be taken away by competitors copying their styles. Both perspectives have merit but they have to be weighed against the realities that face today's investors. That means understanding the buyer's concerns about risk. |
| The first three risks described above are directly related to investment managers. We'll discuss those here. |
| Headline Risk |
his is the single most crucial factor that an executive director, board of trustees or consultant assesses when deciding to hire or recommend an investment manager. The highly publicized mutual fund late trading scandals have shaken investor confidence in the largest names of the business. Given the deep pockets, long tenure, success and compliance personnel that these firms possess, you can only imagine the trepidation a decision maker might have when considering a smaller scale firm. |
These scandals have spawned a whole new set of questions in RFPs and consultant databases in an attempt to minimize headline risk:- Describe your compliance process.
- Describe your trading practices.
- Does your performance composite comply with GIPS requirements?
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| It is very easy to screen out managers who do not have the right answers to these non-investment related questions. |
| For hedge fund managers, headline risk is mitigated - in the plan sponsor's mind - by transparency. While the most sophisticated hedge fund of funds will confess that transparency provides little in the way of being able to insulate an investor from improprieties, it does address one important buying criterion of plan sponsors: comfort. |
| Hedge fund of funds serve two purposes. First, they allow smaller institutional investors diversified access to this asset class. Second, they are a ready market for individual hedge funds to gain distribution. The price of that distribution channel is transparency - showing what is held, how it is priced, when it is traded along with the profile of the fund. |
| Fund of funds and an increasing number of direct investors require and are able to get transparency from hedge fund managers. |
| Tracking Error Risk |
Risk budgeting is the practice of setting and monitoring how far a plan can stray from its projected benchmark returns and what latitude managers will be given in allowing them to stray from their assigned benchmarks. In order to implement risk budgeting, plan sponsors and their consultants need to know detailed historical data on performance and holdings from managers whose asset classes are regularly priced. While this includes hedge fund managers, it does not include other asset classes such as real estate, private equity, oil & gas and timber. |
If you want to play in the institutional arena, performance and holdings is a must. If you are pursuing high net worth clients, this information may be optional, for now. With the increasing availability of online risk management tools, the day is coming when most investors will be able to tell you the exact tracking error risk in their portfolios in much the same way they can tell you their daily results. |
| Talent Risk |
| Institutional investors are particularly apprehensive of personnel turnover. There is no guarantee that the manager or team responsible for generating the performance that got a firm hired will remain on staff. |
In order to get some comfort with regard to this type of risk, investors now ask the tough questions:- Will this team stay with your company over the long term?
- Describe your compensation packages
- Tell us about the ownership structure.
- What is your succession plan?
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| Before you dismiss these answers or give them little consideration, remember that your competitors are using every answer in an RFP as a way to distinguish themselves and present the case that they are the right manager for the prospect. |
| Put yourself in the client's shoes for a moment. If you have ever had to change accountants or attorneys, you know that personnel turnover is arduous. In addition, it is expensive to swap one manager for another when you consider the cost of the search and transition commission expense. |
| Bottom line - full disclosure is in fashion. It is the latest in screening techniques. If investors or their consultants sense that they might be dealing with unexpected surprises during the course of a relationship, they will quickly move on to the next candidate. |
| The Only Thing You NEED To Remember About Calling on Consultants |
Consultants at most firms are responding to current client requests, answering questions about current manager personnel turnover, performance issues, fees and administrative duties. They're also trying to set up their feverish travel schedules, complete the associated call and expense account reports, have a bite of lunch, make a few sales calls of their own and get home to their significant other, children and maybe study for the CFA. They're busy folks so if you want a productive meeting the only thing you need to remember about calling on anyone: RESPECT THEIR TIME. |
Before you pick up the phone, do your research on the consultant. Many have Web sites where you can gather a bulk of general information. If the answers to your questions aren't there, see if a receptionist or secretary can provide them. If you still need more information, consider leaving a short voice mail or sending a to-the-point email. Only after exhausting these options should you place the call to the consultant. By voicemail, truly endeavor to leave message less than one minute in length. By email, be succinct, use the spell checker and if you must send an attachment, keep the file size to a minimum. It is not unusual for consultants to receive 50 - 100 emails a day so think of your subject line as the headline from a newspaper to entice them to open and answer your email. |
Finally, remember that if you don't have a current client or relationship with a consultant or their firm, you are a telemarketer. It may sound harsh but it's true so take a moment to nurse your ego then get over being offended and think about your call from the consultant's perspective. The day to day stuff on a consultant's desk looks just like yours: answering correspondence, going through their to-do list and completing month-end reporting. Only a very small part of their job is to uncover great firms that can add value to their clients' portfolios.
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