There are challenges for both plan executives and managers in making this idea work, including building consensus to define the problem, finding people resources and establishing governance. To accommodate these concerns, there are a variety of approaches in defining strategic partnerships. We focus on four examples of partnerships that have been implemented successfully: opportunistic portfolio; virtual CIO; leadership portfolio; and outsourcing.
The examples fit roughly into each of the four quadrants of the chart, signifying variations in the dimensions of manager discretion and ongoing level of interaction. Thinking about a range of approaches might help clarify what sort of strategic partnership would best fit the investor's organization.
Opportunistic portfolio: In this example, the manager was contacted by a client to help exploit the wide credit spreads in late 2008. The manager, working closely with the plan, implemented the opportunistic portfolio with diversified credit exposures via investment funds, individual bonds and derivatives. To isolate “the bet,” exposure to interest rates was removed and an overlay of the client's strategic asset allocation was added. Ongoing management of the portfolio ensured high performance and material cost savings that would not have been possible if the strategy had been implemented solo. Pension plan officials had prepared its investment committee for rapid approval of such a portfolio, a key factor in the success of this partnership.
Virtual CIO: In this case, the client had a strong desire to improve its internal investment capabilities by engaging a strategic partner to act as a virtual CIO, which enabled the client to observe the manager's actions in “real time.” The client, meanwhile, maintained control over the strategic asset allocation benchmark and investment parameters such as eligible asset classes and total active risk budget. The virtual CIO used its capital markets expertise to construct and manage a high-performing portfolio. The manager provided a window into its investment process and full attribution of its performance. Because the investment parameters and benchmark are the same for the manager's portfolio as the portfolio run by the client in-house, the client gains insight that ultimately makes it a better investor.
Leadership portfolio: A pension plan was interested in a manager's best thinking for meeting certain objectives at the total plan level, but starting with a “blank sheet of paper.” Considering the plan's funded ratio, contributions constraints and risk appetite, the manager and staff of the plan developed outcome-oriented objectives to define the leadership portfolio as a slice of the total portfolio. Implementing the full range of innovative investment ideas at the total plan level might not always be practical, but the leadership portfolio provides a way to try out new ideas, introduce change and demonstrate hypothetical benefits at the overall portfolio level.
Outsourcing: This client lacked the resources to efficiently manage its pension plan independently. The manager provided an outsourcing team that was charged with improving the plan's funded ratio, given the client's limitations on contributions and long-term investment options. In this case, plan officials were more focused on achieving proper governance (including transparency into the investment process) than expanding their own investment knowledge. This entailed more discretion than the other examples, such as determining the most appropriate benchmark and a glide path to de-risk the plan.