The principals at Richards & Tierney Inc. might proclaim themselves the saviors of active equity management. Or they could declare they have an answer to indexing. But they haven't created such labels for themselves, even though the results of their work for pension sponsors demonstrate their success.
The firm, instead, gives its solution a drab, academic-like name: the "completeness fund."
The firm's principals won't discuss their clients, although they include from publicly reported information the Harbor Funds, operated by Owens-Illinois Inc., Toledo, Ohio, and the Minnesota State Board of Investment, St. Paul.
In 91/2 years of doing completeness funds, David E. Tierney, principal, said the firm has been successful at outperforming its clients' domestic equity targets, after all money management fees. Even so, completeness funds haven't caught on yet with any more than a few plan sponsors, even though they profess to look for better concepts in investment management.
Thomas E. Richards, principal, points out pension funds using traditional allocations and manager selection methods have underperformed their benchmarks in the 1990s.
"It's an educational process," Mr. Tierney said. "It requires a paradigm shift in thinking."
Mr. Tierney developed the concept of the completeness fund. The completeness fund is designed to avoid the risk when certain investment styles fall out of favor periodically. It seeks to control that style risk by complementing a manager's or group of managers' composite performance, to ensure a client surpasses its domestic equity target.
Mr. Tierney uses nautical images to describe the value of a completeness fund. Thinking of a pension fund as a boat, the money managers it uses sit on the gunwales. The boat lists to one side or the other, the result of the managers' style bias.
The pension fund, with the assistance of its consultant, hires managers to adjust the listing. But it's very difficult to determine the right style and then find a successfully performing manager and then determine the proper allocation to correct the listing.
"A completeness fund knows how to put weight on which side to judiciously right the boat," Mr. Tierney said. It "corrects style bias and leaves a manager's skill component."
Some $4 billion is managed in completeness funds, affecting $20 billion in equity targets. Richards & Tierney manages the fund for the Harbor Funds. But often the firm serves as an adviser to a completeness fund manager a client hires, like Franklin Portfolio Associates, Boston. Such a fund can consist of 200 or more stocks and invest long and sometimes sell short.
Because the fund compensates for style biases, Mr. Tierney said, a sponsor can select the best performing managers, regardless of a particular style, rather than hire an array of managers in various styles and sectors, often sacrificing performance to achieve diversification.
"We believe you should hire the most skillful manager, regardless of where he operates," said Mr. Richards. "Most sponsors will hire only in certain areas, so they limit their opportunity set."
"We're not saying every client needs a completeness fund, but it needs to investigate to see if the aggregate style bias it has is large enough to warrant one," Mr. Tierney said.
"The cost of doing a completeness fund is less than half the cost of hiring an active manager," Mr. Richards said. "What you get with a completeness fund is more return and less risk."
A completeness fund is no guarantee of absolute outperformance. "If the managers a sponsor hires aren't skillful, then it will underperformance its target," said Ann Posey, principal. "But a completeness fund will eliminate underperformance substantially because of style risk."
"If you don't have any skill in picking managers, we highly recommend you index," Mr. Tierney said. "A completeness fund won't make up for an unskilled manager." There is no value added in saving those managers.
