David Cox is head of listed markets at Brunel Pension Partnership
When it comes to asset manager searches, you can never afford to compromise on due diligence – no matter the asset class.
But as the ESG movement grows ever larger and reshapes ever more portfolios, some institutional investors may make the mistake of separating responsible investment (RI) or ESG criteria from their manager selection processes. In fact, integration is crucial.
This year we have conducted multiple manager searches and gained ample experience to ensure we implement RI principles right through the selection process – and to reflect on whether they worked through monitoring.
Fundamentally, the goal should be to identify high-quality stewards of capital capable of delivering your clients’ desired outcomes.
We offer some dos and don’ts below, which we hope will offer institutional investors some tips on process when it comes to manager appointment, and might help the odd aspiring manager, too.
Our clients ensured RI was at the heart of our investment decision-making from the outset, and so we hope our experience can help others to fully integrate RI into asset manager searches too. If you are not integrating RI now, the current pace of change may mean you get left behind.
Due diligence applies across the board and we always want to receive the widest possible array of suitable submissions. However, this demands clarity and brevity on the part of applicants: they should avoid clichés and waffle!
Those selecting managers should scrutinise strategies to identify managers who offer a sustainable competitive edge. Performance is not screened in isolation. Rather, we look for evidence that managers can meet our targets within all the risk parameters we set.
Above all, we expect managers to demonstrate an openness to exploring new ways of monitoring and managing environ- mental, social and governance risks.
DOs – here’s what we like:
– Show good exam technique! We like managers who think about why we were asking the question. We dislike obvious stock answers from RfP databases, preferring to hear direct from the investment team instead.
– Show evidence of how the strategy is advancing the cause of responsible investing and how the manager is challenging themselves to develop their approach.
– Provide evidence of performance based on a minimum three-year track record, preferably longer, so we can judge your team’s capability. If the proposed strategy is not an exact match for what is sought, managers needed to be clear about the difference and the rationale for its inclusion.
– Demonstrate where the strategy’s return profile differed to reasonable expectations (given market performance), and for managers to explain the deviation if necessary.
– Discuss the impact of reduced liquidity on the proposed portfolio when volatility rises and the typical response function of the team.
– Explain the interactions between the investment team and investment risk function, offering examples of interventions made and their impact as well as outlining resources available and reporting lines.
– Charge fees commensurate with the level of benefit offered by the strategy.
DON’Ts – some things to avoid
Even if strategies meet stringent criteria, any of the following features could result in rejection:
– Reluctance to make the changes needed to support our existing critical policies. Take our Climate Change Policy, for example. If there is no flexibility to meet us on something so central, it is not going to work out.
– A tendency to rebrand existing strategies, to “greenwash” them, or to hide the true track record.
– Failure to quote fees, or else not making them easy to find, especially where there were additional charges in very small print.
– Cherry-picking favourable starting points for the performance track record and providing out-of-date data to obfuscate less favourable recent performance.
– Failures to align fund’s own benchmark to its strategy.
– Realised returns falling short of a manager’s own target or of our target with no explanation, and no detail on how the target might still be deliverable.
A culture of partnership and innovation
A culture match is crucial, no matter who is appointed as manager. At Brunel, we place great emphasis on our investment principles and seek to work with managers who foster a positive, inclusive culture, encourage debate and challenge, learn from mistakes and provide appropriate incentives.
As stated in our Asset Management Accord: “Brunel demands high standards of transparency from the companies and organisations it works with.” This expectation underlies our selection process, as well as our relationship with appointed managers.
We require our managers to align with us through the Accord and to be open to adapt and innovate in partnership with us. To get to the nub of this, we recommend strong vetting and lines of questioning that may even feel intrusive.
But if you set out to establish a strong, long-term partnership, it means ensuring alignment on matters of fundamental importance.