Updated with correction
Unlike most other segments of the money management industry, investment outsourcing lacks standardized investment performance reporting.
Just 18, or 25%, of the 71 firms that participated in Pensions & Investments' latest investment outsourcing survey responded to the question: What percentage of the institutional clients for whom you provide full discretionary outsourced investment have met or exceed their internal benchmark for the one-, three- and five-year periods ended March 31, 2014.
Of the remainder, 59% did not respond; 13% declined; and 3% were too new to have a track record.
Eight reported 100% of the portfolios they manage with full discretion met or exceeded their benchmarks in the year ended March 31: Cardano Risk Management BV, Clearbrook Global Advisors LLC, CornerStone Partners LLC, Gallagher Fiduciary Advisors LLC, Robert Harrell Inc., Peirce Park Group Inc., Pyramis Global Advisors, and Wilshire Associates Inc.
For the three-year period, five managers said 100% of full discretionary portfolios they manage met or exceeded their benchmarks: Cardano, Cornerstone, Robert Harrell, Pyramis and Wilshire Associates.
|Percentage of portfolios managed with full discretion that met or exceeded their benchmark as of March 31, 2014.|
|Manager||1 year||3 years*||5 years*|
|Cardano Risk Mgmt.||100%||100%||N/A|
|Peirce Park Group||100%||33%||N/A|
|Pyramis Global Advisors||100%||100%||N/A|
|PFM Asset Mgmt.||92%||92%||100%|
|SEI Investments (SEIC)||92%||95%||97%|
|Strategic Investment Group||91%||95%||94%|
|J.P. Morgan Asset Mgmt.||89%||88%||89%|
|State Street Global||79%||59%||50%|
|Goldman Sachs Group (GS)||75%||90%||100%|
|*Annualized. Source: Company reports.|
For the five-years ended March 31, six managers said 100% of full discretionary portfolios they manage met or exceeded their benchmarks: Cambridge Associates LLC, Goldman Sachs Group (GS), PFM Asset Management LLC, CornerStone, Gallagher and Harrell.
Among the firms that did not respond to P&I's question, reasons centered on an inability to calculate an accurate composite figure.
“Thankfully, the investment industry is moving away from a myopic focus on returns and managers and is focusing on the big picture, getting the job done: paying benefits, funding scholarships, preserving values,” Kathleen Powers Dunlap, partner and chief strategy officer at Fiduciary Research & Consulting LLC, San Francisco, said in an e-mail.
“The risk profile and asset allocation of a long frozen, fully funded DB plan vs. a cash balance plan vs. an underfunded open DB plan are so different that any composite would be utterly meaningless,” Ms. Dunlap wrote, adding “performance (from outsourcers) is not readily available because in many cases it is irrelevant. Performance is not the measure ... for success. “
FRC ranked 32nd on P&I's list of firms with outsourced assets under investment management as of March 31, with $8.5 billion, all from a single client, which Ms. Dunlap did not name.
“The performance of fiduciary (outsourcing) managers should not be distilled into a single number,” Paul Deane-Williams, a spokesman for Towers Watson & Co., said in an e-mailed response to P&I's information request.
Outsourcing “takes many forms,” and “with this in mind, the notion that fiduciary manager performance can be presented as a single number is, in our opinion, unrealistic,” Mr. Deane-Williams wrote, comparing the practice to “a throwback to how the pension industry operated 20 to 30 years ago” when many plan executives selected balanced funds based on the best relative performance.
“Unfortunately, relative performance proved damaging to the plans and the scars are still visible today,” Mr. Deane-Williams said.
Towers Watson had $65 billion in worldwide outsourcing assets under investment management as of March 31, which placed the Reigate, England-based firm in sixthplace on P&I's ranking.
“Every client that decides to outsource the management of all or part of its defined benefit, defined contribution, endowment or foundation portfolio is unique,” Kevin Jestice, principal and head of institutional advisory services, The Vanguard Group Inc., Valley Forge, Pa., said in an interview.
But unlike Towers Watson and FRC, Vanguard offers clients a sense of how their portfolios measure up to peers by calculating a composite from the returns of investors with similar asset allocations.
The goal of outsourcing is to produce a “stream of returns that accomplishes a purpose,” such as hedging defined benefit plan liabilities or producing an absolute return plus the London interbank offered rate, Mr. Jestice said
Because each investor's purpose is different, Vanguard doesn't use a model portfolio approach; every asset allocation is customized. “It is especially important to get the asset allocation exactly right for each and every client,” Mr. Jestice said.
For the year ended March 31, 90% of Vanguard's clients with fully discretionary outsourced portfolios met or exceeded their policy benchmark. For three years, 82% met or bettered their benchmark, and 77% did so for the five-year periodaccording to data from the firm.
Vanguard was 17th in P&I's ranking, with $21.3 billion under investment management.
Other managers also welcomed the opportunity to provide P&I with performance of their fully discretionary outsourcing strategies.
PFM Asset Management LLC, Harrisburg, Pa., also uses GIPS to calculate the performance of the fully discretionary outsourced assets under its management, James Link, managing director and chief marketing officer, said in an e-mail.
For periods ended March 31, PFMAM's percentage of fully discretionary outsourcing clients that met or topped their benchmark was 92% for one and three years and 100% for five years, the company said.
“(Our) view is that the only real difference between outsourced investments and more traditional asset allocation is the firms providing the service,” Mr. Link added.
He noted that while traditional money managers are accustomed to adhering to performance measurement and disclosure rules, many outsourced strategies are offered by “traditionally non-discretionary investment consultants who have not been required to adhere to the same performance measurement rules.”
Mr. Link said “the investment performance track record is not ultimately that of the non-discretionary consultant, and therefore calculation and presentation does not need to comply with GIPS.” But once an investment consulting firm assumes investment discretion, he said, GIPS performance calculations should become standard.
PFM was 46th in P&I's ranking, with $3.1 billion under investment management in outsourced strategies as of March 31.
What is - and should be - included in investment outsourcing programs for U.S. corporate defined benefit plans is of such concern to the U.S. Department of Labor's Employee Benefits Security Administration that earlier this year, it asked the ERISA Advisory Council to set up a task force to examine the issue and provide recommendations to the Secretary of Labor in November.
In addition to clarifying the legal requirements and other fiduciary issues related to outsourcing for defined benefit plans subject to the Employee Retirement Income Security Act, the task force is charged with recommending “current best practices in selecting and monitoring outsourced service providers, including identification of performance standards, benchmarking of costs and mitigating conflicts of interests,” said the DOL's May 2014 issue statement. n
This article originally appeared in the July 7, 2014 print issue as, "Firms differ on value of performance reporting".