'Knowledge transfer' between clients and asset managers growing

More pension funds are exploring on-site knowledge programs with money managers as part of their strategic partnerships.

Under these programs, pension funds and money managers often will share their employees with their partners for as short as a week or as long as three months.

The most ambitious example is the strategic partnership between the $112 billion Texas Teacher Retirement System, Austin, and two of its private equity managers — Apollo Global Management and Kohlberg Kravis Roberts & Co. Each manages up to $3 billion for the pension fund.

As part of the funds-of-funds arrangement with the firms, pension fund officials established a “cross-training” program for investment staff.

Under the program, Texas Teachers' staff members relocate for up to three months to one of the two firms and then “bring back their experience to share ... and use the experience to advance returns of the trust in the long run and enhance the partnership capabilities between TRS and the firm,” according to the minutes of a board meeting last July.

TRS is being reimbursed by each partner up to a maximum total of $100,000 a year for expenses incurred by any employees participating in the cross-training program, the minutes show.

Staff members also would have to return to the pension fund after the assignment, according to the minutes.

Efforts to interview investment executives at Texas Teachers last week were unsuccessful. But Howard Goldman, director of communications, wrote in an e-mail the program is “still in its early stages as we determine how it can best serve our needs and those of our key partners.”

Programs can also place money management employees at the client’s office. For example, the South Carolina Retirement System Investment Committee, Columbia, which oversees the $26.6 billion South Carolina Retirement Systems, is hosting a portfolio manager from Apollo as part of its strategic partnership program and has done so in the past with others.

“Apollo is an example of an investment manager with whom we have a strategic partnership and who has provided knowledge-sharing services to us over the years,” said committee spokesman Danny Varat in an e-mailed response to questions. “They have sent staff to our offices to advise on both back-office and front-office issues. We do not provide remuneration to firms when they offer such services. We believe these information-sharing relationships provide a great deal of value to the trust, and we plan to continue them when and where it benefits the portfolio.”

Mr. Varat confirmed South Carolina has had knowledge-sharing programs with other managers but declined to name them.

These programs have existed informally for years. Now, however, more asset owners are becoming interested in them.

“We first saw these in the late '80s when Japanese investors would put some of their staff in a local shop,” said Stephen L. Nesbitt, CEO at alternatives consultant Cliffwater LLC, Marina del Rey, Calif. “That was always the deal. Basically, it would help train staff.”

Ricardo Duran, spokesman for the $161.4 billion California State Teachers' Retirement System, West Sacramento, said: “It is a long-term goal of CalSTRS to engage in these types of programs with our managers, as we move assets toward internal management.

“Over time, such programs will be instrumental in training CalSTRS staff to meet that goal. Agreements with our external managers give us the flexibility to do this, but ... due to our internal staffing and market constraints,” CalSTRS has not yet done so, Mr. Duran added.

Lori Holland, Chicago-based managing director and head of client service for institutional asset management at Neuberger Berman, said “buzzwords” like knowledge transfer “are becoming part of the discussion wherever you go. It's definitely something we hear more people talking about.”

Neuberger Berman has been hired by pension funds and sovereign wealth funds as part of strategic partnerships, and has put programs in place for knowledge sharing, she said, but would not identify any clients.

“Clients are expecting it to be more formalized,” she said.

A program can range from something as simple as sending someone to a pension fund board meeting to make a presentation on risk management to a client sending a staff member to Neuberger Berman's offices for up to several months.

For example, one of Neuberger Berman's clients “will be coming in a few weeks and will be spending three months with us,” Ms. Holland said.

“I would say in the U.S. it's probably more of a part of the discussion with the public plans, but increasingly we are seeing more of these types of requests from outside of the U.S., whether it's sovereign wealth funds or other larger pools of money,” she said.

David Kabiller is co-founder, founding principal and head of client strategies at AQR Capital Management, Greenwich, Conn. “Strategic partnerships used to mean managers gave discounts to pension plan sponsors, but ... what you've seen over the years is the evolution of strategic partnerships, and AQR does want to be a part of it. It's all about adding value to the clients and achieving their risk and return objectives,” Mr. Kabiller said.

AQR has participated in knowledge-share programs with clients since the 1990s, Mr. Kabiller said, but less formally and frequently than they do now. (He declined to identify any of the clients.) Training is provided on an as-needed basis, but has increased as part of the growth in strategic partnerships.

“I think there will be more and more of this,” Mr. Kabiller added. “People all over the world want to get value from their money managers. There happens to be a lot of great talent, and institutional investors want to get more value. ... They want access to ideas, how to build analytical tools, how to manage risk.”

While many of those ideas and tools have been be provided by investment consulting firms, at least one consultant does not see this latest progression as a threat to business.

“From a consultant's point of view, when we think about our clients generally it's a triangulation of the board or the investment committee, the internal expertise of the staff and an independent external consultant that has expertise as well,” said Cliffwater's Mr. Nesbitt. “Basically, you know, these types of relationships can help strengthen staff, assuming once they're trained they can keep these people. As a consultant I never viewed it as a threat but generally viewed it as a positive to the extent that these groups can provide help and expertise, all the better.”

While often it is the larger money managers that have the staffing and time to participate in these programs, that is not always the case.

Lisa Anderson, New York-based partner with alternatives money manager Napier Park Global Capital, said a few of the firm's institutional clients have sent staff members to its offices for a month or more. She declined to identify any.

“Napier Park is fortunate to have the infrastructure available to provide ... (such a) program for our significant strategic partners. We have found that having the client embedded into the investment process greatly improves both the transfer of knowledge and the overall strategic relationship,” said Ms. Anderson.

Limited resources can be a roadblock for both asset owners and money managers to implement these kinds of training programs. For asset owners, a thin staff makes it difficult to send people away for long periods of time, while money managers have to be choosy about which clients they can train because they can only accommodate a certain number.

“I think there's a lot of resource constraint to institutional investors. There can be thinly staffed organizations, whether it be for funding reasons, so there's some constraints plan sponsors sometimes face,” Mr. Kabiller said.

“The reality is these are high-touch, customized solutions to client needs and in light of that, have to be customized and conditionalized,” he added. “We always have to make a business judgment and we have finite resources. We have to say, "Who can we engage in a strategic partnership with and where we can maximize gain?.' We can only handle so many.”

Mr. Kabiller added that did not mean only big-ticket accounts would be invited for lengthy visits: “They don't have to be huge, the client may be smaller.” But, “there's economics to our time. You can imagine it has to make long-term business sense, it's a business decision, but has to make mutual sense.”