What does it take to get investment consultants and managers together?

By Charles J. French, CAIA,

It’s a common frustration – investment managers believe they have a world-class product but don’t understand why they cannot gain approval with respected investment consultants.  From their perspective, they have “checked all the boxes” and firmly believe that their product should be included in all consultant driven manager searches.

Their product has an established track record, superior performance against both peers and benchmarks, the investment approach can be articulated and the operation does not have any “red flags”.  What’s the mystery ingredient?  What is missing?

To better understand the dynamic of selecting fund managers amongst a universe of high quality choices, I asked several leading institutional investment professionals with research responsibility for insight into the selection process.  Rather than direct them to any specific area, they were presented with a blank canvas.  The consultant’s comments are not meant to be comprehensive, but do illustrative aspects of a rigorous selection process that ultimately results in good outcomes for their clients.   Their thoughts are as follows:

“There is no doubt that today’s landscape is incredibly competitive.  According to eVestment Alliance, there are more than 400 unique large value products.  If you are marketing one of those products, you are probably thinking, how can I stand out?  As the Director of Manager Research at Marquette Associates, I am typically inundated with requests for meetings. I’d like to offer three points of advice that I think will make our working relationship stronger and more positive on both ends:

1)      Know Thyself. No firm can be all things to all clients. First and foremost, know what kind of investment product you’re trying to sell.  This may sound simple, but I don’t know how many times I’ve had to follow up with a sales person telling me they offered “long-only equities.”  Be specific and know what you’re selling. Know your competitive advantages. Those are likely the distinctive elements that can separate you from the competition.

2)      Do Your Homework.  This is critical, but so often overlooked.  Look at the consultant’s website; get a sense of who they are.  There is typically a ton of information on a firm’s website, from white papers to client lists.  At the very least, you can read the investment professional’s bios and understand who does what.  The best question I get from marketers: “What is your process for due diligence?” We have a detailed, highly-organized process for vetting managers.  The first step is not an in-person meeting, but a series of quantitative and qualitative reviews before meeting in person.  Understand how the research process works first before asking for in-person meetings.

3)      Find a Good Match.  Not all consultant firms see the world in the same way.  We view asset classes differently, what to index, what role alternatives play.  It’s important during those first few conversations to give the consultant a chance to say, “we use that asset class a lot” or “sorry, we just aren’t that interested.”   Accept that the answer is no, and move on.  There are probably 5 other firms out there that would use your product, you just need to find them (i.e. refer back to #2)
In the end what we’re trying to create is a partnership, between us, you and the client.   My goal is to set you up for success with a client who will understand your firm, process and performance for the long term. “

Kelli Schrade

Managing Partner, Director of Manager Research

Marquette Associates, Inc.

“There are many strong managers out there, but the best ones are consistent and have an observable edge that separates them from the pack.

Consistency goes far beyond performance.  A manager with a consistent team, investment process and adherence to its investment style will separate itself from the pack (of strong managers that otherwise meet selection criteria).  Continuity of the investment team (or consistency of personnel) allows us to confidently assess the track record of the manager’s investment process.   A consistent investment philosophy and process is critical because it allows us to project how the manager is likely to perform in a variety of different environments, and it allows us to set realistic expectations at the time the manager is hired.  Being able to set realistic expectations based on a detailed understanding of the manager’s process and unique style biases is a critical component of investment manager selection success.  In other words, virtually every strong performing (and consistent) manager will have its ‘dog days’.  Knowing when to hold versus fire an underperforming manager is a critical and underappreciated component of success (or failure) for investors.

The other critical component is an observable edge, which may be the way the manager acquires and/or interprets data, conducts its research process, builds its portfolio, sizes positions, or manages its exposures.  The manager’s pedigree, depth of its team, and the quality of its resources are also critical elements that separate the best from the pack.”

Matthew Rice, CFA, CAIA

Principal, Chief Investment Officer

DiMeo Schneider & Associates, L.L.C.

“There are many investment firms with good investment teams and strong products. What tends to differentiate the excellent firms are the following characteristics:

  1. A transparent, easily understood organization.
  2. A consistent firmwide investment philosophy that all investment professionals believe in and that defines all products the firm offers.
  3. A focus on investment performance, not sales.
  4. Excellent client service that keeps the consultant informed about organizational and team changes, new products, and performance issues.  Responsiveness to consultant and client requests is also critically important.”

Susan N. McDermott, CFA

Senior Vice President, Chief Investment Officer

Stratford Advisory Group

Other logical suggestions to improve your firm’s chances for success include:

  • Help the investment consultant get prepared – send information on your firm and offerings in advance of a meeting.
  • If the consultant has client facing responsibilities, don’t press for meetings in May, August, November, and February – it shows a lack of understanding of their business.
  • Make sure your firm’s investment personnel are made available during the investment consultant’s due diligence process.  If they are not, it’s unlikely your product(s) can be approved.

I am grateful to Kelli, Matt, and Susan for sharing their thoughts on selecting fund managers.  Since institutional investment consultants control so much institutional asset flow, their suggestions should be weighed carefully within an asset manager’s sales and marketing plan.  Understanding and adopting practices that augment the consultant manager search process can only improve the odds for good outcomes for all parties.

Chuck French is President of Wamberg Asset Management – an incubator of unique alternative investment structures designed specifically for financial institutions.  In addition, he has led sales and marketing for a leading institutional investment consultant.  He can be reached at chuck.french@wambergam.com.

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