The remote-working environment is forcing investment consultants to rethink the way they assess money managers on behalf of institutional investors, leading to concerns over the ability of firms to get onto all-important recommended lists.
The coronavirus pandemic and subsequent lockdowns worldwide have not stopped investment strategy search activity. And with institutional investors back up and running when it comes to hiring — and perhaps terminating — managers as they pick over market opportunities, consultants now have to keep up with any changes within existing relationships, and in some cases familiarize themselves with new firms and strategies, in a virtual manner.
"Can we build the same level of conviction virtually? The answer is probably no, but it's not quite as bad as we feared," said Nick Samuels, London-based head of manager research at investment consultant Redington Ltd. "It's a little more efficient, you can get through more in a shorter space of time, and we don't have the travel time we used to, which can instead be used by meeting more people, or further desk-based quantitative work."
However, "the big stumbling block is not being able to conduct the on-site visit. This tire-kicking exercise is crucial to understand an organization and verify with our own eyes they are who they say they are. The implication ... is that it will be harder for newer entrants to get ratings until some normality resumes. In a theoretical, all-things-being-equal choice between a manager we know well, have visited on numerous occasions, and someone new to us, the latter now has a hurdle to jump over that wasn't there pre-COVID," Mr. Samuels said.
San Francisco-based Callan LLC conducted 254 conference calls with money managers from March 12 to May 13, said Amy Jones, senior vice president and co-manager of the consultant's manager research group. "We are connecting with managers via WebEx and Zoom, with a preference for video calls as they allow for a connection similar to what we would gain with face-to-face meetings in our offices."
The firm's due diligence has not been hampered by the remote-working situation, and in some cases has improved manager meetings where "multiple members of a portfolio management team join the call, which provides a broader perspective than we might receive in an office visit with just one member of the team," she said.
At the start of the coronavirus crisis, institutional investors hunkered down and moved to safe, liquid assets such as money market strategies, said Paget MacColl, New York-based managing director and co-head of the Americas institutional client business at Goldman Sachs Asset Management. "Consultants were moving money with managers that were already buy- or A-rated, or they already had a history with — it wasn't new search activity, but quick moves with existing managers."
The difficulty comes with interest in new, opportunistic and Term Asset-Backed Securities Loan Facility strategies, which may be offered by newer or emerging managers — meaning they are not necessarily on a consultant's recommended list.
That means consultants are "having to start to think about how to do due diligence with managers without going on-site," such as with new managers specializing in distressed strategies, "where they have no history with them," Ms. MacColl said.
It has led to a higher bar being set for new managers to meet, sources said.
Investment consultant NEPC LLC's investment team is conducting due diligence via videoconference. "While the managers' investment teams are also remote, and we may not be able to see the same team interaction that exists in normal environments, we are still able to pick up on important signals as a result of these videoconference calls," said Sarah Samuels, partner and director of marketable securities in Boston. She oversees NEPC's public markets and hedge fund manager research. In some cases, supplemental operational due diligence may also be necessary to make sure firms meet NEPC's standards.
"While the bar is higher for new investments in firms and strategies with whom we haven't invested before, we will certainly consider new investments provided we can get comfortable with the firm, strategy and team," Ms. Samuels said.