We like to give the outsourcer a fair amount of discretion; we don't like to obstruct their process. But we like to be an advocate — and be a real internal set of eyes, if you will — for the institution, while also working in tandem with the outsourcer on things. So it's a bit of a hybrid to some extent, but that's how it's been set up and those are some of the drivers that got us into that position.
Prior to us retaining an outsourcer, we used a traditional consultant. We didn't make the switch because we were concerned about conflicts. It was more because of ... efficiency of decision making; having an adviser really advising, rather than making recommendations to the committee, was a big thing for us.
Clearly we didn't want to take on unnecessary conflicts. We were very careful not to retain a firm that had proprietary products ... We directed our outsourcer (by saying): To the extent that you do have the fund-of-funds approach, we really don't want any part of that. If there is a recommendation for that, our internal staff vets that very thoroughly and decides the cost benefit of doing that.
We have, for example, a smaller asset pool within the Cleveland Clinic whereby that structure makes a little sense ... (in that) it's a smaller amount. We still want exposure to alternatives. But to hire or to build a portfolio of hedge funds, for example, with a total portfolio in the $10 (million) or $20 million range, for example, ... it's hard to do that on a separate-account basis. So we're thinking about structures like that where it might make sense, but at the same time, being very conscious of the fees involved, who gets paid what.
We were pretty emphatic about no conflicts right off the fence, but the decision was really driven more by process, and understanding the subtleties within the outsourcing arena as to how to find a manager that really fit with us. You know — what are their processes? What do they emphasize?
We talked a lot about managers that focused just on manager access, for example, vs. portfolio structuring, and a lot of other qualitative factors, too.
We wanted the outsourcer and internal staff to have flexibility to react to market environments and make tactical decisions — rebalancing, for example, without having to wait for another committee meeting to go back and take 2% out of domestic equities ... or something like that.