Manager Selection

It’s time public pension plans harness the power of their asset manager network

High return targets, low interest rates and an extremely uncertain investment environment. These are big...

April 22, 2021

High return targets, low interest rates and an extremely uncertain investment environment. These are big challenges for public pension plans and many believe it will be harder to deliver success over the next decade than it has been over the last. 

There is a need for more advice and stronger partnerships with asset managers so that they can work together to design custom solutions that deliver the desired outcomes.

The proposed benefits of adopting this style of relationship with asset managers include:

  • Get exactly what you need
  • Access an asset manager’s best ideas
  • Access other resources (e.g. models and analytics)
  • Better terms (e.g. lower fees)
  • Greater control and transparency

The greater demand for custom solutions and advisory relationships marks a major change for the industry, which has been designed to deliver standard products.

Unfortunately the industry has been slow to adapt and it is more difficult and time consuming than it needs to be work with asset managers on custom solutions. 

In response, pension plans have developed different approaches (as shown in Figure 1).

Figure 1: The landscape of current approaches to solutions partnerships

The challenges mean that many pension plans are not implementing custom solutions, even if they want to. These pension plans are the “Pragmatists” that reside at the bottom of the pyramid.

Pension plans suffer from information overload due to the thousands of emails sent by asset managers with pitches for new ideas. It is impossible to filter through them to identify the best ideas and therefore many pension plans choose to ignore them all.

The bar is also set higher for implementing custom solutions as it can be more complex, time intensive and they often lack track records. This can make getting consultant support for the strategies more challenging. The pension plans in this category therefore opt for standard funds over custom solutions, even if they believe a custom solution would be a better fit.

The next level on the pyramid are “Thought-partners” who overcome some of these challenges by working with a small group of asset managers on their investment challenges. This could be on an informal basis, for example, approaching their current equity managers if they have a particular challenge in their equity portfolio. Alternatively, it could mean appointing a few asset managers as strategic partners. 

The challenge with this approach is that it is hard to know which asset managers are willing and able to deliver the best ideas and solutions for all the different investment challenges that a pension plan may face. By limiting discussions to a small group it often means that either appropriate solutions aren’t found or better solutions are overlooked.

At the top of the pyramid are public pension plans who are committed to finding the best answer to each of their investment challenges. In order to achieve this, they maintain a large network of both large asset managers and specialist boutique managers. 

Unfortunately, developing and maintaining a large network of asset managers is extremely time-intensive. One large pension plan quickly realized they were wasting time in meetings where they were pitched solutions that weren’t current areas of focus. In addition, they found themselves repeating the same thing to each manager they met with.

Such inefficiencies become more apparent when engaging with a large network to generate the best ideas. However, rather than accept this as a cost of the approach, the pension plan found a way to save time and still benefit from having a close relationship with their network of managers. 

The idea was to invite all their asset managers to a day at the races at the start of the year. Over the course of the day, the pension plan presented their current financial situation and areas of focus for the portfolio for the next year. This meant subsequent conversations throughout the year were more focused and relevant. 

This worked well - it saved time and increased the quality of the solutions they received. However, it required significant time and expense to be invested upfront to host the event. It also doesn’t work if things change over the course of the year and further updates are required. 

Should pension plans aim for the top of the pyramid?

Having evaluated each approach, a key question is whether pension plans can increase their chances of success by moving up the higher levels of the pyramid.

The goal of advancing up the pyramid would be to get more out of the relationships with asset managers through custom solutions and best ideas. We strongly believe that such relationships can add significant value to pension plans and help them navigate the challenging investment environment that lies ahead.

However, each approach to working with asset managers faces a common challenge - the market is still interacting in a manual, slow and repetitive manner. This makes it very difficult and time-intensive to identify and implement the best solutions.

The question we should be asking is why the industry has yet to adopt greater use of technology to improve the efficiency of interactions. Such technology has already made our personal lives easier in many ways. The time has come for a better digital buying experience within institutional asset management.

The silver bullet solution for pension plans would be to leverage technology to create an idea-meritocracy with a wide range of thought-partners. However, to make it so quick and easy that even the “pragmatists” would adopt the approach.

This would help improve the current asset management ecosystem where pension plans are bombarded with pitches for standard products with little regard to their needs and priorities. The transformed model would enable asset managers to truly put client needs first and partner with pension plans and their investment consultants to deliver solutions that exactly fit those needs. 

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Zermelo is a platform for institutional investors to research, request and develop custom investment solutions. We make it quicker and easier to find the best solution that exactly meets your needs.

Ed Studd

CEO, Zermelo

Ed is passionate about helping institutional investors meet their goals through better custom solutions. Prior to Zermelo, he gained extensive experience across asset management, investment banking and investment consulting.