Institutional investors increasingly have been demanding both more transparency and more of a dialogue over how their assets are being invested and portfolios are being constructed and the pace at which asset owners want more of a dialogue with their asset managers is continuing to rise.
“The knowledge gap between agents and fiduciaries is continuing to close,” said Michael Trotsky, executive director and chief investment officer of the $58 billion Massachusetts Pension Reserves Investment Management Board in Boston. This, he added, has led to “a massive change in the industry where the power is shifting to the asset owners.”
Said Jack O'Connor, head of business development and client service at DDJ Capital Management LLC, Waltham, Mass.: “Plan sponsors want to understand what the managers are doing as much as possible and the only way to do that is to have discussions with them.” DDJ Capital, a boutique manager that specializes in high-yield strategies, has approximately $7 billion in assets under management.
As investing has become more complex and asset owners have become more knowledgeable about investment strategies, institutional investors want to be regularly briefed and consulted on how their portfolios are being constructed.
Although there are a number of reasons for this shift, the financial crisis of 2008-'09 is the most notable.
“Coming out of the financial crisis has engendered more of a need for oversight and for (pension fund) boards to get as much financial information as possible,” said Michael Roberge, president and CIO of MFS Investment Management Inc., Boston. MFS Investment had $420 billion in AUM at March 31.
Andy Keith, managing director and head of outsourced CIO at U.S. Trust Corp., Boston, agreed, pointing out that due diligence in selecting a money manager has always existed, “the crisis brought some elements into full focus,” such as the need for more in-depth research into the money managers' investment processes. “That's something that wasn't as in-depth a research point prior to 2008 that it is now.”
“Asset owners are much more aware of their fiduciary responsibilities now,” he added. “So in 2008-2009, fiduciaries realized they needed to become more active and understand these products better. They couldn't just rely on the consultant's advice alone.”
“Pre-2008, clients were mostly interested in hearing product updates and focusing on performance,” said Carol Geremia, president of MFS Institutional Advisors Inc. and the firm's co-head of global distribution. “Now, with the business so complex, they stay in touch more and are looking for more information about a broader range of topics,”
“Our conversations with clients about risk management have increased tenfold since the crisis,” she added.
Another cause for the increased demand for transparency is the shift toward more “benchmark agnostic” strategies.
“Years ago, things were more benchmark oriented,” said DDJ's Mr. O'Connor. “Since a lot of plan sponsors want to allow the manager to do something further afield from the benchmarks, they need to be comfortable with their managers.”
Pension plans like MassPRIM are becoming much more savvy about their money managers' investment processes. In doing so, they are following in the footsteps of such large plan sponsors as California State Teachers' Retirement System, Sacramento.
According to Michelle Cunningham, deputy CIO of the $180.8 billion state pension plan, CalSTRS has expected “a high level of transparency” from its money managers for as long as she's been there.
“Because we're a large public fund we need to be transparent,” she said. “It's been part of our philosophy.”
Mr. Trotsky said he doesn't believe size is an issue — the shift is seen among many different types and sizes of institutional investors.