As Funds Switch to Remote Work, Outside Manager Selection Gets Tougher
Art by Tim Peacock
After a presentation from an asset manager last week, a board member at the Kentucky Retirement Systems (KRS) urged caution to his colleagues. Wait six months, he said, before considering a $200 million investment into a direct lending firm.
It wasn’t because the private equity firm, Blue Torch Capital, didn’t impress the investment committee. But board member Kelly Downard said the asset manager’s past performance matters very little given the unprecedented supply chain issues that its borrowers are facing in this economy.
Better to wait half a year to see where markets land and how the firm performs in the interim, he said. The majority of his colleagues disagreed. Not taking a risk now on a likely money maker may mean the fund will miss out on the benefit of a good-performing asset, they said.
“If we were to wait six months, a percentage of the opportunities will be gone,” KRS CIO Rich Robben said during the teleconference meeting.
The episode highlights the uncertainty around conducting due diligence on managers—even managers already in the pipeline—a month into the pandemic. As it is, traditional vetting activity that requires on-site visitations has ceased at investment firms, given travel and social distancing considerations.
But pension funds have adapted. After scrambling those first couple weeks of the coronavirus crisis for their cameras and microphones on teleconferencing applications such as Zoom, investment teams are conducting business as usual and, indeed, trying to assess opportunities remotely, as well as overseeing the operations of existing outside managers.
“We have been focusing on working with our existing managers and potentially broadening their mandates when and if they find opportunities,” KRS CIO Robben said in an email.
James Bennett, chief investment officer at Maine Public Employees Retirement System (MainePERS), said he found that it’s been easy enough to access managers via telephone.
Others, such as the team at the Oklahoma Police Pension and Retirement System (OPPRS), are relying on outside consultants. OPPRS says it’s largely depending on the Missouri-based Asset Consulting Group to conduct its due diligence.
“We trust and value their opinions,” OPPRS Executive Director Ginger Sigler said in an email. The police pension fund is roughly 101% funded.
Like other allocators, the Oklahoma Police Pension and Retirement System said it’s focused mostly on investments that were already underway, including switching the management of its long-short hedge fund to K2 from Grosvenor.
The allocator said K2, which made a presentation to the pension fund in March, has cheaper management fees. While the fund canceled a face-to-face meeting with K2 this month, Sigler said it still plans to visit when it’s allowable.
“We are focusing on staying the course and rebalancing to make sure that we stick with our asset allocation plan that we have in place,” Sigler said. “This is not the time to panic and make knee-jerk decisions.”
Other funds say they have ceased all due diligence as they are focusing on their portfolios and doubling down on their investment strategies.
“Given the level of volatility in the global financial markets, maintaining our investment philosophy is paramount,” Brad Tillberg, CIO at the Oklahoma Public Employees Retirement System, said in an email.
The fund, which at around 98% is almost fully funded, is not conducting any new manager searches at the moment. The $8.9 billion fund currently has an asset allocation of 40% U.S. stocks, 28% international stocks, and 32% domestic bonds.
But for CIOs who are conducting prospective manager search activity, the coronavirus has altered how to evaluate different firms. Here are three key areas that are important to consider when evaluating different managers:
Seamless Switch to Remote Work:
Few could have foreseen a shutdown on the scale of this one caused by the coronavirus. But fund managers have dealt with other crises before, whether they be natural disasters such as Hurricane Maria in Puerto Rico in 2017 or man-made crises such as the September 11 attacks. Key for fund managers is to have an information technology (IT) staff with the expertise to switch teams over to remote work as quickly as possible.Downturn Strategy:
It’s a new world, and the strategies that worked at the start of the year no longer apply now. As a rule of thumb, this means that active managers should have a basic understanding of how their strategies perform in a bear market, according to a note from consulting group Wilshire Associates. Investment teams that choose managers with high-quality balance sheets will perform better during downturns, Wilshire researchers said. Choosing managers’ investing styles is a key item for scrutiny. A value-oriented manager is likely not going to perform as well during a downturn. The opposite is true when markets recover.Operational Stress:
While the turbulence from the coronavirus has opened new investing opportunities, it has also strained outside managers’ businesses. Analysts at Wilshire said some may seek to lay off members of their teams to cut costs. That may constrain the operations of some managers, which have already been contending with lower fees, thanks to the switch to passively managed strategies and the rise of artificial intelligence, according to the consulting firm.
For many asset allocators, the transition to remote operations has been smoother than anyone could have anticipated before the pandemic. Perhaps that will remain the case after workers return to the office.
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