Risk management is by far the factor that has gained the most importance for institutions scouting the market for external expertise. Seventy per cent of the respondents – which included asset managers, life insurance companies and private banks – believe systems used to control and manage risk to be one of the three criteria that has acquired more prominence since the crisis. The transparency of the investment process, consistency of long-term performance and quality of the management team are the factors that carry the most weight when making the decision of which sub-adviser to appoint (see figure 4).
More emphasis than ever is now placed on understanding how the manager generates alpha or excess return. “We need to understand where the returns come from and what we can expect in different market environments moving forward,” says Ralf Ferner, head of multi-management at SEB Wealth Management, the Nordic asset manager that has €5bn of its €126bn total assets in segregated, sub-advised mandates.
“The investment process and the thinking of the management team, the key man risk, the remuneration and retention policy are the most important factors and have always been so in the past. But other factors have gained even more prominence such as risk management, operational risk and liquidity.”
However, performance is still the main driver in manager selection, with around three quarters of respondents stating long-term consistent returns head the top three selection criteria, followed by management team and investment style (see figure 3).
The financial crisis has proved to be an excellent benchmark to test the consistency of the investment process. “Some managers did not hold their nerves very well during the crisis and changed their portfolio without following their investment process,” says Jaime Arguello, head of multi-manager and third-party funds at Barclays Wealth, the UK-based institution which has one of the largest multi-manager platforms in Europe, overseeing around £8bn (€9.8bn) in assets.
“The years of 2008 and 2009 provided us with a very interesting opportunity to analyse how the managers navigated the financial crisis.”
Mr Arguello, an experienced and influential figure in the manager selection space, is adamant that managers who drifted away from their mandate should not be given a second chance.
“Arguably, in 2006 and 2007, a lot of the returns that were generated were very much beta. But beta hurt you seriously in 2008,” says Luke Reeves, head of retail and institutional business development for asset management at Matrix Group, a privately owned financial services businesses in the UK.
“The crisis has definitely enabled allocators to be able to identify managers that operate a solid risk and investment management systems,” he says. “However, we are not saying that if you had a good 2008 and 2009, you are a fantastic manager and will only ever do good. But if they did poorly in 2008-2009, then you have to ask what changes were made on an ongoing basis and you can then have your analysis on that and see whether or not you agree or disagree.”
The intense turnover of key managers in the asset management industry over the last five years has led to a boom-time for new boutiques, often founded by talented managers with the support of strong financial organisations. These smaller, high conviction firms, have increasingly become the preferred choice for some institutions looking to delegate.
“In the last three to five years, more than 50 per cent of the firms we hired were boutique managers,” says Pascal Duval, executive managing director and 15- year veteran at Russell Investments. “We don’t have a preconceived idea that boutiques are better, but the boutique organisational framework has been much more available recently than it was in the past.”
There are an increasing number of talented managers that leave large organisations and set up their own boutiques. Frequently, if that manager or team were the main reasons why the firm was employed as sub-adviser, then Russell will continue hiring them in their new company and seed their products.
“Fundamentally, asset management is a people business, it is about people making decisions on investing money,” comments Mr Duval. “We have numerous examples where we have seeded new products in newly created companies, because we know the manager or the team.”
When giving out mandates, a three or five year track record on the product is not needed to appoint a sub-adviser, unlike with a fund of funds. “The track record of the product is irrelevant, it is all about the track record of the manager,” says Mr Duval. “What is important is to invest in those new boutiques from the start, because then the team really focuses on delivering the performance; they start from zero and they have to grow, so they know performance is absolutely key.”
