Consultants at center of pension fund shift toward streamlining

Public pension funds' hunt for money managers is moving toward a streamlined search process and away from the traditional RFP, a shift driven by investment consultants.

Instead of requests for proposals, plan executives call on their consultants to mine their databases of investment managers to put together a comprehensive list of managers that would fit criteria for a portfolio assignment, and then narrow the field to a small group of finalists.

Consulting firms are driving a retooling of the conventional RFP process for public plans to make it more efficient and effective, adapting an approach corporate pension plans typically already use.

Consultants say the streamlined approach has appeal because it:

• saves plan executives time and resources;


• provides better field of candidates;


• addresses a squeeze on money manager resources for marketing, including responding to RFPs;


• takes better advantage of high-tech database and analytical tools; and


• improves accuracy of information, while helping to avoid technical eliminations.

Corporate pension plans, which typically don't issue RFPs, have long searched for managers by putting together their own shortlists with the assistance of an investment consultant, said Carl Hess, global head of investment consulting at Towers Watson Investment Services Inc., New York.

“I'm unconvinced of the value” of RFPs in producing a list of capable managers, Mr. Hess said.

Consultants are bringing that streamlined approach to public plans to the extent it doesn't conflict with statutory contract bidding requirements.

The City of Milwaukee Employes' Retirement System is s pioneer in using a process for seeking money managers that other public funds are adopting.

The $4.3 billion pension fund does not issue RFPs, said Thomas Rick, chief investment officer. Instead CMERS relies on Callan Associates Inc., the pension fund's investment consultant.

“We want them to use their database to search for the best managers,” Mr. Rick said. “They're doing (extensive) research on managers. It makes sense (to have Callan screen managers from its database) instead of having managers submit to RFPs.”

In a recent search for a global growth equity manager, Callan came up with a long list — narrowed by officials of the pension fund and the consulting firm — before CMERS selected MFS Investment Management, to run a $210 million portfolio, Mr. Rick said.

In searches for the Milwaukee fund, Callan typically has produced lists of 100 to 200 managers, a field narrowed eventually to a set of three to five finalists for the pension fund's board to consider, Mr. Rick said.

CMERS reaches out to managers, advising them to complete an online questionnaire on Callan's website to be considered for inclusion in searches, he said.

Unlike many public funds, CMERS is exempt from public procurement requirements, enabling it to streamline its search process, an approach it has used since the 1990s, Mr. Rick said.

Last April, the New York City Retirement Systems began a pilot search process using databases of multiple investment consulting firms to identify managers for an active MSCI EAFE portfolio instead of issuing an RFP and limiting the field to managers that respond.

The consulting firms were Callan, Rocaton Investment Advisors LLC, Strategic Investment Solutions Inc., NEPC LLC and Buck Consultants LLC.

Last March, the $11.2 billion Los Angeles City Employees' Retirement System adopted a search process that doesn't require an RFP. Instead, when a search is needed, Wilshire Associates Inc., LACERS' investment consultant, will review its database and recommend a list of finalists to the board.

Many public funds, such as the $156.9 billion Florida Board of Administration, Tallahassee, occasionally do invitation-only RFPs. In one instance, the FSBA sent invitations to five specialty fixed-income managers to apply in a shortlist search for a firm to run $1.4 billion in “unusual, illiquid or difficult to market” securities.

Consultants as well as plan executives using a streamlined approach see the RFP process as an inefficient way to search for managers.

“Much of that information that one might glean through an RFP, we've already gotten as part of our ongoing manager research process,” said Towers Watson's Mr. Hess.

In this alternative approach, clients “are depending on us to do the manger research and come up with candidates presented in a format that enables their decision-making,” he said.

Towers Watson has more than 3,000 investment managers in its database, rating more than 3,700 investment products, Mr. Hess said.

“We had 6,200 meetings with managers last year,” Mr. Hess said, noting some were multiple meetings with the same manager, which might have multiple investment strategies.

The streamlined selection process is more efficient for managers as well, Mr. Hess and other consultants said

“Under a traditional bidding process, a manager has to fill out a 60-page RFP, (for example), even though the manager filled one out (a week earlier) for another (prospective) client,” Mr. Hess said.

For quantitative information on managers, Towers Watson and NEPC use data from eVestment Alliance, Marietta, Ga. For qualitative information, they do research and interviews with managers.

Timothy F. McCusker, NEPC partner and director of traditional research in Cambridge, Mass., said eVestment also has qualitative information, such as manager turnover, structure and legal issues.

Discussing the transformation to a consultant-selected process, Gregory C. Allen, president and director of research at Callan in San Francisco, said, “The spirit of the RFP process is one of inclusiveness. So it doesn't lend itself to a process that starts with a shortlist; that's a process by definition of exclusiveness.” But Mr. Allen has noticed managers are less willing to engage in RFP-driven searches since the 2008 market downturn.

“Filling out RFPs is a pretty time-intensive process for an asset management firm, and the odds of being selected are perceived to be pretty low because of the number of respondents,” Mr. Allen said. “So I think a lot of firms are increasingly doing a cost-benefit analysis and not responding, and disqualifying themselves from the process.”

“A public fund about a year ago did a search and ... got about 45 responses to an RFP,” Mr. Allen said. Fund staff asked Callan to review the list for completeness of “all the good managers in this space.” Callan, in turn, found “some really good firms” responding to the RFP but representing less than one-third that could have bid on the business, Mr. Allen said.

“Because of the inefficiency of the process and because there has been increasing pressure on marketing budgets and so forth at asset management firms, (RFPs) actually turn out to be more exclusionary than ... in the past,” Mr. Allen said. “So I think that is a little bit of a trend.”

“So in response to this (hurdle), what I've seen lately is public funds being willing to accept standard responses (of managers) to consultant questionnaires. There is basically a 99% overlap in what"s in a typical RFP and what a consultant asks for” in building its database on individual money management firms.

Using the streamlined process of accessing information on thousands of managers in consultant databases, “you end up with a much larger starting universe” of managers for a search, Mr. Allen said.

The database-driven search can lead to a broader procurement process, Mr. Allen said.

“What that results in, in our experience, is a much broader set of names to start with. As long as you have a process where you can demonstrate it wasn't just a short-list-driven process but you actually started with the complete list and you are able to show reasons why firms were excluded all the way down to the ones selected, then in spirit you are exactly consistent with an RFP process. You've got a much more efficient data collection, data management, data transfer process, which is less exclusionary,” Mr. Allen said.

“It's not unusual for (RFPs) to be 140 pages and another 180 pages of attachments,” Mr. Allen said. Analysts at consulting firms then must “cull through that, make sure all the I's are dotted, t's are crossed,” Mr. Allen said. “It's very time consuming. As a result, I don't think it's as accurate” as consultants' questionnaires and databases.

Mr. Allen said the challenge for public plans is to fulfill public procurement while using a streamlined search process.

“I think the challenge is conducting a (search) process that allows you to get off of your shortlist,” Mr. Allen said. “That's what a lot of managers complain about when they talk about consultants is that they're not inclusive. I think that's why the RFP process prevails in a lot of states or cities.”

“The onus is on you as the consultant to demonstrate inclusiveness,” Mr. Allen said.

“Because we work with so many plans where this is an important issue, we have a well-resourced outreach program, Callan Connect,” an effort to reach out to minority and other emerging managers getting them to embrace the Callan database and complete its online questionnaire, the Mr. Allen said.

Callan's database has more than 1,300 managers and 7,100 performance composites of investment strategies.

The database process is also more cost-effective, Mr. Allen said, “The paper RFP is the most expensive in terms of time and resources. Going from a long list to a short list to a finalists' list and being able to document every step of the way, that's the way we do things anyway so it doesn't cost us any more.”

The move to a streamlined process is coming both from consultants and pension executives, Mr. Allen said.

“It's a push and pull, Mr. Allen said. “We offer it. Anytime there is an RFP process, we'll mention it. It typically becomes an internal (client) question. They have to talk with their legal folks. There is usually a process to move away from the inefficient (RFP) process they have to go through.”

Mr. Allen doesn't have an estimate of the size of the public-fund universe that could move to a streamlined search process.

Funds must determine on a case-by-case basis whether they can use the approach, consulting with legal and compliance people, Mr. Allen noted. He said determination often involves “analysis of procurement rules and regulations, which vary widely across states, counties, and municipalities, and may be determined by statute.”

Towers Watson and other consulting firms have an incentive to reach out to managers not in the firms' databases.

“Unless we are out there actively finding the next generation of good managers, we are unlikely to deliver as much value to clients as we can,” Mr. Hess said. “It's in our own interest to find emerging managers.”

Steven J. Foresti, managing director, Wilshire Associates Inc., who oversees investment research at its Wilshire Consulting unit in Los Angeles, said Wilshire's database also contains thousands of investment managers and strategies covering all asset classes.

“The more efficient we can become in capturing data and putting together an appropriate list for clients doing customized searches” the more time and resources plan executives have to spend on other aspects of overseeing their assets, Mr. Foresti said.

The Wilshire fee to a pension plan is the same whichever process is used. “But resources would be more efficiently used” in the streamlined approach, Mr. Foresti said.

While the database-based search process speeds up searches, Mr. Foresti said it's not meant to encourage plan executives to hire managers quickly to exploit short-term strategies and then move on to another strategy and another manager.

“I think marginally” the streamlined process can enhance investing, Mr. Foresti said. “It can't hurt. But this is not a process where you are looking for a manager to invest (with) for (only) the next six months. You are looking for a firm that is stable and (offers) a high probability of delivering long-term results.”

Rachel Carroll, consultant at Russell Investments, Seattle, said the traditional search process “certainly is time-consuming for any plan sponsor to read through even 20 RFP responses and really glean an understanding what makes a manager uniquely ideal for a position within a particular plan's portfolio.”

Russell, which focuses on corporate clients, doesn't “use the RFP process,” Ms. Carroll said. “Our manager research group has such a wealth of knowledge about particular managers...strengths and weaknesses and what their focus is and how they fit with other managers. The dialog there combined with supporting analytics I think is a better process.”

Russell collects its own data on managers, said Ms. Carroll. To make sure it is inclusive in its database, “We actually go through an annual process where we link up our database with eVestment Alliance ... to make sure we're doing an adequate job of keeping track of those emerging- ... or minority-managed products,” said Ms. Carroll.

NEPC's Mr. McCusker said he thinks managers “prefer the more streamlined approach because of the resources they have to dedicate to filling all those RFPs.”

“But there are certainly some structural reasons (procurement restrictions) why it won't” completely replace RFPs, Mr. McCusker said.

For pension executives, Mr. McCusker said, “I think from a resources perspective that is a lot of time they don't have to spend reviewing RFPs and ... thus the analysts and staff members can really focus their time on higher value-added areas. I think that is at the end of the day a cost saving.”