One-stop shopping grows

Pension funds finally are turning to multiasset class managers in numbers.

While pension executives have been reluctant to give managers investment discretion for large chunks of their funds, the idea is reaching the tipping point.

Increasingly, pension officials are forging strategic partnerships or master manager arrangements and naming the money manager as a co-fiduciary. That relationship lets the money manager design the portfolio and pick both internal and external managers, speeding up the manager selection process and more efficiently investing pension dollars in capacity-constrained alternative investments.

The idea is not new: GTE Corp. pioneered the concept in 1995 for its defined benefit plan. But these arrangements were rare and tended toward money managers running the portfolio internally with a global tactical allocation overlay.

Today, strategic partnerships are just as likely to involve big alternative investment mandates us-ing an open architecture platform that by design includes external managers and a wide spectrum of strategies and asset classes. The master manager typically becomes a co-fiduciary, and can use both internal and external managers. However, the range of these strategic partnerships is extremely wide.

Among the institutional investors that have forged strategic partnerships with money managers this year are:

•The $110 billion Teacher Retirement System of Texas, Austin, hired four large multiasset managers to manage $1 billion each in portable alpha portfolios (Pensions & Investments, April 14 ). The move is the brainchild of T. Britton Harris IV, chief investment officer who held the same position at GTE.

•Ford Motor Co., Dearborn, Mich., hired Lehman Brothers Inc., New York, in late March to manage at least $3 billion in alternatives, with hedge funds, private equity and real estate each reportedly getting $1 billion from the firm's $46 billion defined benefit plan (P&I, March 17).

•South Carolina Retirement System Investment Commission, Columbia, has signed two strategic partnership deals worth $1 billion each with FrontPoint Partners and its parent company, Morgan Stanley, New York, to manage hedge funds and private equity. Officials of the $30 billion plan are searching for managers for $800 million to $1 billion investments in opportunistic credit and emerging market debt/high yield (P&I, Feb. 22);

•Pending successful contract negotiations, Arizona Public Safety Personnel Retirement System, Phoenix, will give 90% of the $7 billion fund to Benchmark Plus Management LLC, Tacoma, Wash.; BNP Paribas Asset Management LLC, New York; Morgan Stanley; and Western Asset Management Co., Pasadena, Calif., in a variation of the master manager model using index-plus strategies (P&I, April 28).

The urge to partner with managers is market-driven, said consultant David Morton, partner and head of alternative investment research at Rocaton Investment Advisors LLC, Norwalk, Conn.

Access to capacity-constrained investment strategies and investment discretion is critical in order to act quickly on investment opportunities in an era when competition for alternative investment capacity is very high, Mr. Morton said.

“Capital needs to be competitive to be able to get into the best alternative investment strategies and that means that decision-making has to be much faster than ever before. These strategic partnerships are one way for large domestic pension plans to streamline the investment process, to make it more reactive and governance much smoother,” Mr. Morton said.

Changing the investment decision process is a big deal for many pension plan sponsors, said Deborah D. Boedicker, principal, Strategic Investment Group, Arlington, Va.

“The move to partnership relationships is part of a tectonic trend toward outsourcing the decision-making of manager selection ... Institutional investors are altering their governance structures, extending and expanding by naming the money partner as a discretionary co-fiduciary when it comes to investment,” Ms. Boedicker said.

Managers report that their prospect pipelines are filling up with interested institutional investors.

“We've seen a big increase in the interest in the strategic partnership concept. It's not a brand-new idea, but I think some of the recent hires have really pushed up institutional interest. I think we're hitting the tipping point for these kinds of relationships,” said Alan H. Dorsey, managing director, alternative investment strategist at New York-based Lehman Brothers. In addition to Ford, Lehman Brothers' other recent strategic partner is the Texas Teacher fund.

Mr. Dorsey, a former consultant, said a huge attraction of strategic partnerships for institutional investors “is the value-added services. In exchange for managing a large pool of assets, managers can provide a lot more portfolio construction services than they could for a regular account.”

Mr. Dorsey noted that because each strategic partnership is very labor-intensive for the manager, care has to be taken not to exceed capacity, a point echoed by other managers.

“Each of these strategic partnerships is unique. They are complex, typically spanning a wide range of alternative asset classes, designed to give institutions access to talented advisers and capacity in desired asset classes. They all have wrinkles and hair ... and are complicated to set up and administer ... They all require the construction of a global multiasset portfolio that completely fits an individual client's needs,” Ms. Boedicker said.

Her firm, Strategic Investment Group, manages $15 billion in alternative funds of funds, including several large strategic partnerships that Ms. Boedicker did not identify.

Only a handful of global multiasset firms with the institutional heft, research capability, capacity with the best external alternative investment managers, and wide spectrum of investment strategies needed, sources said.

Among the managers most often hired recently as strategic partners are Lehman Brothers, FrontPoint/Morgan Stanley, JPMorgan Investment Management, BNY Mellon Asset Management and BlackRock Inc., all of New York; and UBS O'Connor LLC, Chicago. And though Strategic Investment Group manages much less than these megamanagers, Ms. Boedicker said the firm's pipeline of partnership prospects has filled up this year.

Consultants generally are receptive to client interest in strategic partnerships, even if the manager's involvement is more consultative than in a traditional account.

“There's increased awareness that the lines between what a consultant and a money manager are getting blurred,” said Patrick Mulvey, managing director and head of marketing and business development, Rogerscasey LLC, Darien, Conn.

“With harder to implement strategies like alternatives, manager-institutional partnerships make perfect sense. The reality of the markets we're in right now mean that everyone has to be more creative and at the end of the day, what everyone wants to do is find solutions for clients,” Mr. Mulvey said.

Contact Christine Williamson at [email protected]