Genlyte Group, a $500 million (sales) manufacturer of lighting fixtures, decided to outsource the entire management of our defined benefit funds. We decided managing our pension assets was a full-time job for investment professionals. We were not driven to this conclusion by external criticism or poor performance.
Rather, we made the move in the recognition that investing is not our core competency.
Our decisions to appoint fund investment managers had been made ad hoc, not in the context of a fundamental investment strategy.
Genlyte has several defined benefit plans totaling $40 million in assets. The plans are overseen by a pension and benefits committee, composed of our chairman and members of our human resources and finance staffs.
Until January, we managed the assets in our plan by dividing the combined portfolios into two pieces -- equity and fixed income. Then we picked a handful of firms to manage the money. The committee met quarterly to review the performance of our managers.
We are not a big enough company to add that talent to our staff, so our only sensible alternative was to outsource the task. We had plenty of offers for asset allocation studies from consultants and fund management services from investment firms.
However, our goal was to find a firm that could advise us on all aspects of our pension management and have a stake in the quality of their advice to us beyond simply receiving consulting or asset management fees.
There are many companies who manage employee retirement assets as we did at Genlyte. As we searched for an alternative approach, we encountered the weaknesses and potential pitfalls of the various "traditional" approaches to pension management. By recounting our search for an investment partner, we can share these findings with other companies that might be looking for a pension management alternative and have experienced similar concerns.
Because consultants don't share in our plans' performance -- good or bad -- the traditional approach of hiring a consultant who would help structure the portfolio and then make suggestions for selecting money managers was not for us. We saw a potential conflict of interests with investment firms acting as both the consultant and the money manager. Specifically, we believed their internal "consultants" might have incentive to recommend their own firm's managers and funds to keep the money under their roof. Thus, we decided this approach was not for us either.
After determining that pension consultants or investment firms weren't the right solution for us, we began looking at single-source providers to simplify our pension management process. We searched for a provider that would offer an integrated process that includes structuring the portfolio, selecting outside managers and monitoring them to make sure they adhere to their investment strategies. We liked that these single-source providers offer all of these services, and importantly, are compensated based on our plans' performance and asset growth.
After considering several single-source providers, we selected SEI Investments Co. of Oaks, Pa. Its range of services has greatly simplified our pension management process and added a degree of professionalism we could never have replicated in-house. The SEI professionals analyzed our pension obligations, proposed a diversified asset allocation strategy consistent with the timing and nature of our liabilities, and invested the money we entrusted to them with managers who could be relied upon to execute that strategy. SEI actively monitors those managers' results, a task we could not possibly do on our own, and they share in the upside or downside if those managers exceed or miss benchmark performance.
We need our provider to keep their advice to us fresh. With a single-source provider, we still will get periodic routine reports on investment performance, but we do not expect them to wait until the next quarterly meeting to tell us we need to adjust our strategy. We can have as much control as we want in the process, and could be privy to day-to-day performance if we chose to receive daily updates.
Additionally, our provider's specialization and size gives them the ability to provide their service package to us at a lower cost than we were incurring prior to their appointment.
The firm we selected also was able to recognize that we could only enter into a relationship with them if they were flexible. For example, one of our equity fund managers was consistently earning outstanding returns for us. Our new provider's task of diversifying our portfolio would have been simpler if we had entrusted that money to them as well, but it would have been foolish to make that change and they worked around it. SEI kept that manager, Neuburger & Berman, New York.
SEI also has taken a very broad view of service to Genlyte, even introducing us to fund managers whose investment profiles might cause them to invest in Genlyte shares. Only our successful equity manager had previously offered such help to us.
SEI -- which is free to set the asset allocation -- decided to keep Genlyte's mix at 65% equities, 35% fixed income, where it had been before we hired the firm. But SEI changed the style mix within the equity allocation.
To those who are struggling to find a more efficient and cohesive process, single-source providers might be the right solution for you, too. With a single-source provider, we have succeeded in finding a pension management alternative that provides an integrated investment process, advising us on all aspects of our pension management and having a stake in our plans' performance. Today, our pension management program follows a cohesive investment strategy, providing sensible matching of pension assets and liabilities and reducing risk through diversification of assets.
Now we at Genlyte are free to focus on our core business, confident that we are fulfilling our responsibilities to our current and future retirees.
