One of the main weapons in a trustee’s arsenal is a great asset consultant and asset managers. Consultants are the people who make recommendations about what a fund should buy and sell, while asset managers look after the investments held in a fund.
So what criteria should trustees use to select these important advisers?
Named recently as ratings house Chantwest’s asset consultant of the year, JANA Investment Advisers is considered a leader in the field. Chief executive Ian Patrick says assessing an investment manager is all about the “five P’s” – philosophy, process, people, performance and price.
Patrick says the philosophy aspect relates to the alignment of investment beliefs between the client and investment manager. Process is how the investment manager goes about executing its philosophy. For instance, if the philosophy is to limit losses of capital in down markets then the investment process should show clear evidence of the investment manager evaluating the buffer between the price of a stock and the manager’s assessed valuation of that stock.
“Then you look at people, and whether they can give effect to the investment manager’s mission through their skills and insights. Better decision-making comes from a contested array of inputs, as well as people who are aligned with remuneration and governance structures to deliver the fund’s objective,” he explains.
Performance and price are harder to assess, says Patrick, because they are not straightforward, but underpin the other two Ps.
“Every portfolio requires a number of tradeoffs and trustees must decide if the asset manager can compensate for any gaps they might have elsewhere in the portfolio,” he says.
For instance, many managers are biased to the small- and mid-capitalisation part of the market, creating an unintentional bias. This may not be ideal from a risk-management point of view, but trustees might be able to accept this bias, recognising the risks attached, because the manager has established people and processes.
“The best outcome flows from an alignment of fundamental investment beliefs. For instance we don’t believe in short-term market timing. If a client has a different philosophy it’s likely we will struggle to meet its needs,” he explains.
BREAKING UP IS HARD TO DO
Patrick says the way in which consultants recommend clients exit managers is also a good indicator of their core beliefs. “Terminating a manager that is performing well is the hardest decision. But if it has had a strong run of performance the odds may be stacked against it in a different market environment. Or it might be that significant business growth means the manager won’t be able to deliver the same performance in the future.”
He says enduring relationships between trustees and consultants happen when there is a feeling of mutual partnership. The consultant must also be able to add value to the portfolio on an ongoing basis.
“The relationship between an investment committee and an asset consultant needs to be one of trust on both sides, and all parties working towards the same mission. The asset consultant must take the interests of the investment committee to heart.”
According to Patrick, at some point it’s natural for trustees and investment committees to question whether they can access better quality advice.
“This will be a more pointed question if there has been no value-add for a while. Which means it’s up to the asset consultant to challenge the investment committee, make comments and recommendations and drive change,” he says, adding, “but these are relationships at the end of the day and it’s a people business.”
Fraser Murray, senior consultant at Frontier Advisors, says the role of asset consultants has changed since many portfolios have acquired substantial in-house investment management committees. So for him, the first priority is an understanding of the internal capabilities and how an asset consultant could work alongside them.
For instance, he says, “in-house capabilities might cover equities, but might have no expertise for understanding property or infrastructure. Or they might not have the resources in-house to deal with the workload.
“But every fund has evolved in a unique way, which makes it an interesting world for asset consultants because assignments are very different.”
HIGH-LEVEL STRATEGIC ADVICE
When choosing an asset consultant, Murray says it’s important for the trustees to understand the breadth of their capabilities and how they scour the investment universe. He says the depth of the research they do is also an important factor to consider.
He also explains funds’ requirements have changed. “In the past, we would simply have provided a report to the trustees on each manager.
“But now, with internal teams, clients are looking for a database of managers, where we store meeting notes on managers, which clients love because they like to see these notes as well as reports and ratings.”
From a superannuation fund’s perspective, choosing the right asset consultant is about the strategic advice it can offer at a high level and how the consultant can assist in the manager selection section process.
Innes McKeand, AustralianSuper’s head of equities, looks for consultants with a broad network who conduct high-quality research and have insights the fund isn’t able to generate internally. “We’re looking for a network of information to supplement what we do ourselves. It’s also about the experience of their key people and having an independent mindset. One benefit we like is a consultant that challenges our thinking,” says McKeand.
Paul Kessell, chief investment officer of Kinetic Super, says it’s crucial to engage an asset consultant whose success is aligned with the fund’s success.
“The asset consultant becomes an extension of the super fund’s investment team, offering a range of services and resources that would not otherwise be available. In the increasingly competitive MySuper environment, achievement of long-term investment objectives are paramount and being able to tap into the global reach of an asset consultant can contribute positively to what we’re trying to achieve for our members,” says Kessell.
He says Kinetic measures asset consultants on the organisation itself, its people, philosophy, research skills, innovation and thought leadership and ability to build a strong partnership.