Rob Joseph, senior vice president in product management at Northern Trust, Chicago, said the manager would have to be able to look through non-transparent strategies, as well as have experience in managing passive portfolios, trading derivatives and providing back-office accounting and position integration. "It becomes a coordination effort," he said.
"I think that's kind of the next wave," said SSgA's Mr. Pope. "It will be an increasing component of our business, especially as the appetite for alternative types of investments grow within the institutional investment community."
The master manager concept evolved from Mr. Ennis' long-time frustration with the current state of investment management at most pension funds.
The development of increasingly narrow style boxes and growing roster of specialist managers over the past 20 years has led pension executives to closet index — while paying active management fees, he said.
The reason pension officials might hire, say, 20 domestic equity managers, eight international stock managers and six active fixed-income managers is because many "lack the confidence" to pick the best managers, he explained in an interview.
"Outwardly, they're optimistic about their ability to select active managers. But to a large extent, they're guilty of closet indexing," Mr. Ennis said in the interview. "It doesn't appear to me that they're trying to exploit active management. It appears they're trying to protect themselves from it. They're trying to outperform — but not by much."
Mr. Ennis publicly has rejected narrowly defined mandates for managers. Instead, he has called for the adoption of "whole-stock" portfolios that give managers far more latitude in making investments.
But that doesn't go far enough. "Employing fewer managers with broader mandates is a relatively easy, reasonably conservative way to render implementation more flexible while reducing, rather than increasing, complexity," the text of Mr. Ennis' AIMR address says.
The next logical step would be to remove barriers to shorting stocks — basically, hiring long-short managers.
But hedge funds rarely are market-neutral, despite their claims to generate pure alpha. In fact, a study authored by Mr. Ennis and Ennis Knupp associate Michael Sebastian found 44% of diversified hedge fund assets had market exposures, and up to 80% of the return variation is market-related in recent periods. That study, "A Critical Look at the Case for Hedge Funds," has just been picked by Journal of Portfolio Management editors as one of the best articles published in the academic journal last year.
That conundrum led Mr. Ennis to focus on how to truly separate alpha and beta. This way, the pension fund would be paying high fees solely for alpha generation, while paying little for garden-variety beta exposure.
Pension executives would do well if they could identify eight to 10 managers, regardless of their respective strategies, and put a small portion of the total fund with those managers, Mr. Ennis said in an interview. The remainder of the fund would be invested passively, buying beta cheaply, he said.
"It could be long-short strategies, it could be commodities, it could be financial futures trading, it could be bond arbitrage, it could be any number of things," Mr. Ennis said in the interview. "It could be things not included in their policy portfolio."