As institutional asset owners demand more outcome-oriented solutions, money managers increasingly are seeking out specialty or niche firms to help them subadvise their assets.
This, along with increased scrutiny from the U.S. Securities and Exchange Commission, chief compliance officers and asset owners, has led to a more intense due diligence process when setting up subadvisory deals, managers on both sides of the table say.
And, they said, money managers looking for — and looking to provide — subadvisory services also are working to create more collaborative relationships.
“There's so much creativity out there and such a sea change in creatively co-designing solutions as opposed to fitting in a style box. It's a big change from before the crisis,” said Barbara A. McKenzie, a senior executive director and chief operating officer of boutique operations at Des Moines-based Principal Global Investors. Principal subadvised $144.7 billion in assets at year-end 2013.
“Things are becoming more complex. Investors are expecting more from managers,” said Davis Walmsley, a consultant at Greenwich Associates, Stamford, Conn.
“Institutional investors are struggling with conflicting needs,” he explained. “On one hand, they're seeking to diversify and take risk off table. On the other hand, many are underfunded and seeking alpha to get these funds back in a funded position.”
So, asset owners are looking for a manager “who can pull together a more holistic solution for them” to provide the diversification and protection against risk that they need, but to also “get them the returns that achieve their funding objectives,” said Mr. Walmsley.
As a result, managers looking to provide these more complete solutions to their clients need a subadviser or subadvisers “to fill in some of the gaps within their products,” said Mr. Walmsley.
Because of an increased need for a more collaborative partner or partners, the due diligence process for selecting a subadviser has gone beyond performance and history. Money managers, Mr. Walmsley said, are “looking at the firm's underlying philosophy and who's in the team.”
Scott Herrick, director of national marketing and client service at money manager Becker Capital Management Inc., Portland, Ore., agrees.
“The due diligence process seems to be a lot longer than it's been in the past,” said Mr. Herrick. Becker Capital, a boutique manager that has a total of $3.2 billion under management, about $290 million of which is as a subadviser.
“The focus has gone from a product level review to include an overall corporate assessment,” Mr. Herrick added. “With what happened with Bernie Madoff, no one wants to look like they're not doing their due diligence.” (Mr. Madoff in 2009 pleaded guilty to fraud charges connected to operating a Ponzi scheme.) Managers seeking third parties to manage some of their assets “are very interested in protecting their clients from any potential conflict.”