More institutions agree to share

Big institutional investors around the globe are cooperating and collaborating on investment ideas to an ever-greater extent as they seek better control over, and returns from, their portfolios.

That sharing of experience, deal flow and due diligence — while not entirely new — is taking on greater significance as investors bolster in-house management capabilities and, increasingly, move away from awarding hands-off mandates to external money managers.

“Information sharing, transaction sharing, experience sharing” among long-term investors has “really accelerated over the past two to three years,” noted William Royan, the Toronto-based head of relationship investing with the C$129.5 billion (US$121.5 billion) Ontario Teachers' Pension Plan.

Ontario Teachers' close ties with institutional heavyweights such as Singapore's GIC Private Ltd. and Temasek Holdings (Pte.) Ltd., China Investment Corp. and the Abu Dhabi Investment Council, have “dramatically expanded” the range of investments Ontario has been able to make in recent years, said Mr. Royan.

Other asset owners struck a similar tone.

For the New Zealand Superannuation Fund, it's a matter of identifying peers “who we're most like” in areas such as governance, portfolio management and investment time horizons, and working together “to find better ways to be closer” to investment opportunities, said Matt Whineray, the NZ$24.8 billion (US$20.4 billion) fund's Auckland-based general manager of investments.

A number of asset owners said the common pressures they work under make for an alignment of interests they can't necessarily find when dealing with investment banks or third-party money managers.

Still, selecting institutional partners isn't easy.

Mr. Whineray — who pointed to the C$76.1 billion Public Sector Pension Investment Board, Montreal; the C$70 billion Alberta Investment Management Corp., Edmonton; and the Abu Dhabi Investment Authority as some of his fund's closest peers — said the need to get the alignment right requires approaching those relationships like a marriage.

“The thing we gain is perspective,” said Stephen Forshaw, managing director, corporate affairs, with Temasek Holdings, Singapore's S$215 billion (US$171.3 billion) sovereign wealth fund. Those ties enable Temasek “to become more aware of other opportunities, build our networks and understand more about each other's interests,” he said.

“For us, it's not a competition; we're very comfortable with bringing others to the table, and ourselves being invited to the table,” said Mr. Forshaw.

Every big investor claims to be “long term,” but relatively few have the scale of assets or the luxury of time in meeting their liabilities to be long term in practice, said Mr. Royan. When such investors are able to act together, it makes for a “very attractive investment environment,” he said.

That search for soul mates might be one ripple effect of the 2008 global meltdown, which found institutional investors fretting that other investors in the same assets could be forced to sell at the worst possible time.

There are benefits to teaming up with investors who have similar time horizons and approaches to liquidity management, noted Tom Joy, the London-based director of investments for the Church of England's $9 billion investment portfolio.

Allocating assets alongside “like-minded” investors allows for better control of governance, agreed Leo de Bever, CEO of Alberta Investment Management, in an e-mailed response to questions. Other benefits include reducing the cost of searching out investment ideas and disintermediation of private equity managers with high cost models, he said.

New Zealand Superannuation's ties with peers have led to a handful of investments over the past year.

The fund's relationship with Montreal-based PSP led it to contact the Canadian fund when Harvard Management Co. expressed an interest in selling some of its 60% interest in the Kaingaroa Forest in New Zealand's North Island. New Zealand Superannuation owned the other 40%.

“We knew PSP well ... knew they were interested in the natural resources space,” and were confident they would be a good partner, said Mr. Whineray. That led, one year ago, to PSP picking up a 30% stake in the forest from Harvard.

More recently, an “innovation alliance” forged last year among New Zealand, AIMCo and ADIA to invest in growth capital opportunities globally led to investments last month by New Zealand and AIMCo in Ogin Inc., a Waltham, Mass.-based developer of wind turbines, and half a year ago in Bloom Energy, a Sunnyvale, Calif., maker of fuel-cell on-site power generation systems.

Asset owners expect fraternization among big global investors to grow stronger in coming years.

In a Nov. 13 presentation at Pensions & Investments/Nomura Securities' global pension symposium in Tokyo, Peter Pereira Gray, the London-based chief investment officer of the $25 billion Wellcome Trust, predicted “an increase in partnerships between major global investors, sharing their assets with a select few that have similar cultures, horizons and governance.”

“That will mean we'll all need to invest in our relationships, because to effect those investments we want to make, we will have to do it with others,” he said.

Bulge-bracket investors say they're open to expanded ties.

The Korea Investment Corp. is “keen on cooperating with various global investors,” when it comes to sharing information and investment opportunities, said Dong-Ik Lee, the chief investment officer and interim CEO of the $65 billion Seoul-based sovereign wealth fund.

If there's general agreement on the trend, details vary widely.

Mark Anson, chief investment officer of Menlo Park, Calif.-based Acadia Investment Management, the Bass family office, said such ties are “a growing phenomenon,” but largely informal. They “are meant to be casual — calling upon each other when there is a need,” he said.

By way of example, Mr. Anson noted that when he worked in the U.K., “twice a year, the CEOs of British Telecom Pension Scheme, Norges Bank Investment Management, PGGM and ABP would get together to discuss corporate governance, investment ideas, asset allocation and anything that we thought topical” — a gathering that went under the name “the Four Leaf Clover.”

He said he's looking now to develop a similar casual network of billionaire family offices in the U.S. “to share ideas.”

For other investors, outreach to fellow heavyweights is a bit more structured.

For example, over the past year New Zealand Superannuation has assigned relationship managers for each of its closest peer relationships — a means, explained Mr. Whineray, of maintaining a focus that might otherwise get lost amid the day-to-day demands of managing the fund's portfolio.

Asked if growing ties among institutional investors should be causing third-party money managers to lose sleep, one London-based asset owner, who declined to be named, suggested they might. After years of being disintermediated by money managers, teaming up with institutional peers on direct deals should offer growing opportunities to turn the tables on them, he said.

But few investors anticipate wholesale changes.

Institutional investors always have to ask if they have some competitive advantage to make successful direct investments, noted Mr. Joy, who continues to tap external managers for 60% of the Church of England's portfolio. If they don't, the costs of lost investment opportunities are likely to outweigh whatever is saved on manager fees, he said.

In a recent interview, Andrew Stewart, a New York-based managing director and co-head of BlackRock Inc.'s alternatives investment business, said the ability of money management firms with deep global resources to compare the risk-reward trade-offs on the gamut of available investment opportunities should ensure continued opportunities to serve major institutional investors, even as their internal capabilities grow.

Even so, some asset owners predict the way investors of sufficient size employ external managers will continue to evolve.

“Changing our relationships with third-party managers ... is a big focus for us now,” with the goal of giving New Zealand greater flexibility to adjust the fund's risk allocations as its assessments of market opportunities change, said Mr. Whineray.

“The ideal manager relationship for us is a true partnership, where financial interests are aligned and we can engage and share knowledge — rather than just monitoring and receiving,” he said.

Wellcome Trust's Mr. Pereira Gray said the heavy investments his fund is making to build partnerships in sectors such as real estate could include third-party managers who can “act locally, but think globally.”

But, he added, “I would want that manager to be a major investor in their own right, and not to just be an adviser taking a fee.” n