Asset owners who spoke with Pensions & Investments like to customize the way in which they use their investment consultants.
In fact, legal troubles and ineffective results have led a few plans to revamp the way they work with their consultants and select managers over the past few years.
For example, Vince Smith, deputy state investment officer and head of the investment group of the New Mexico State Investment Council, Santa Fe, which oversees $20.6 billion in assets, said in an e-mail that, in the past five years — since a pay-to-play scandal forced a board reconfiguration and regime change — the investment council staff has increased its engagement and gotten much more involved at all levels of the investment process.
In addition to much greater engagement by the council members, New Mexico SIC has added new oversight committees for investment, audit and governance. Its legal review and contracting systems are much more robust, both with investment consultants and managers.
“In every case, we seek a heightened standard of fiduciary duty and a pledge that our general partners and advisors are experts in their field,” said SIC spokesman Charles Wollmann. “We feel that by focusing on these critical aspects from day one, we are attracting higher quality managers on the front end of the process and achieving some additional value and safeguards down the road.”
Meanwhile, Michael G. Trotsky, executive director and CIO of the $61 billion Massachusetts Pension Reserves Investment Management board, Boston, explained the board staff does most of the heavy lifting when seeking a manager.
Rather than rely on consultants to seek out the managers and make the case for the best one, the MassPRIM board does its own diligence and seeks out and identifies investment managers it wants to do business with, using internal databases and customized algorithms to determine which managers would be a good fit.
“We use consultants as an extra set of eyeballs to check our work,” Mr. Trotsky said. “We drive our own thinking, investment selection and monitoring.”
This method of operations is relatively new for the board. Mr. Trotsky said that before MassPRIM made this shift in 2013, the board would wait for one of its existing managers to underperform “for a very long time before firing them.” Once the manager was dropped, the board would issue an RFP and later choose from the managers that applied.
Mr. Trotsky said that process was too slow and passive: “We’ve become much more engaged in this process.”
Because the $105 billion State of Wisconsin Investment Board, Madison manages approximately 60% of its $105 billion in assets in-house, the consultants it works with don’t have as much responsibility in making recommendations for the hiring and firing of managers.
“We don’t sit back and let the consultant do all the work. We’re working side-by-side with them. It’s a very collaborative effort,” said SWIB chief investment officer David C. Villa, adding: “I haven’t lived through any episodes in which we didn’t take the consultants’ advice.”
Andrew Palmer, chief investment officer of the $45.7 billion Maryland State Retirement & Pension System, Baltimore, described the system’s multiple consultants as “an extension of the staff.”
“The decisions reside with the board and staff. We use (our consultants) for advice. It’s a collaborative relationship,” Mr. Palmer explained.
Added Mr. Palmer: “It’s good to have an unbiased outside party with expertise that’s not selling stuff that can give us an objective opinion.”
