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Pensions & Investments: Consultants revisit how to assess managers amid pandemic

May 29, 2020

Sarah Samuels was featured in a recent P&I article. 

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.

Mercer Ltd. has clients interested in new asset classes and opportunities such as TALF and distressed debt, said Debbie Clarke, global head of investment research, based in London.

"These can be researched by our team and Mercer has the access and resources in order to make a new assessment. We know many managers, and if a strategy is managed by a firm we know well we would feel comfortable assigning a high rating without meeting face-to-face," she said.

However, the importance of meeting a new manager in person means that, for firms or teams of which Mercer has no prior knowledge, "we may be more cautious and decide to assign an interim rating until we can meet face-to-face. It is very much case-dependent and this is an area where we draw on the deep experience of our team and allow them to use their judgment," Ms. Clarke said.

And Aon PLC has also had to rethink the way it assesses new managers. The firm's manager research team has "created temporary guidelines for rating funds during the current pandemic when on-site visits are not possible," said Paul Whelan, U.K. head of fixed-income manager research in London. "These guidelines retain some flexibility to adapt to specific situations," he said. In normal times, the manager research team will often make multiple on-site visits.

The new guidelines mean that, where Aon has "extensive knowledge of the team and organization managing a strategy and have physically met with the team in the recent past, we would be willing to perform our due diligence processes via virtual meetings with the manager," Mr. Whelan said. For a firm not already covered by Aon's manager research team and where a strategy "locks up investors for more than (a) year we would not be comfortable assigning a formal rating and completing our due diligence until on-site meetings were able to take place."

The current pandemic presents both challenges and opportunities for emerging managers, sources said.

"We believe the fundraising challenge will be pronounced for new emerging managers that lack existing LP relationships," said a spokesman for alternatives manager Grosvenor Capital Management LP. "Cultivating new LP relationships has historically relied on in-person meetings to gain credibility. That's become more challenging in the current environment. Plus, many LPs are slowing their deployment pacing and focusing on re-ups with existing managers as they assess the pandemic's impact on their existing portfolios. Informed by our experience investing through the (global financial crisis) though, we remain actively engaged with emerging managers regarding new commitments," he said.

While the bar has been set high for emerging managers, GCM Grosvenor expects "2020 and 2021 will be strong vintage years for new capital deployment, as were the years coming out of the GFC," the spokesman said. GCM Grosvenor has committed or invested $16.6 billion in small and emerging managers across alternative investment strategies. The firm has more than $55 billion in total assets under management.

However consultants have adapted to continue rating and assessing money managers, concerns remain that remote working will be detrimental to emerging and smaller firms.

"There is an advantage to either being an incumbent of just being a big firm where (consultants) really had to do the diligence" in the past, GSAM's Ms. MacColl said.

While Willis Towers Watson has not yet seen any instances of new money managers that require full due diligence from scratch, "we will not be opposed to starting it virtually if the value proposition is compelling enough for our clients, with the understanding that we will have to conduct an on-site at some point in the future," said Luba Nikulina, London-based global head of research. "This is particularly important for operational due diligence on new firms."

Ms. Nikulina added that WTW has deep knowledge and relationships in the money management industry, "so there are hardly any asset managers that we haven't met in the past physically and where we can just continue our dialogue virtually given the current constraints."

Aon's Mr. Whelan said his firm will only attribute ratings to strategies in the current environment according to a "direct and urgent need. If we already have a similar buy-rated strategy, we will wait until an on-site visit is possible to proceed with the debrief. We will not assign ratings to closed-ended vehicles being launched by asset managers with whom we have not previously conducted on-site due diligence until an on-site is achievable."

Callan, which does not maintain a recommended list for money managers, continues "to encourage clients to review familiar managers as well as those that may be new to them, particularly if an on-site visit is not required," Ms. Jones said.

For firms new to Callan's research team, due diligence is conducted via video or conference calls, due diligence questionnaires and thorough analysis of data, including portfolio holdings. "We have instigated 'new manager introductions' to our manager search committee," she said. "So those involved in approving managers in a search situation are familiar with these new firms and will be better prepared to form an opinion on them should they make it into a search."

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