Failure to consider alternative fund structures – In many cases, the underlying problem is not the skill of a manager but the suitability of the fund structure. Consider a $100-million fund managed equally by two balanced fund managers. Assume that the total fund has consistent above-median, below-benchmark performance. To raise returns, the plan sponsor may request a search for two new balanced fund managers. The difficulty is that the two managers, as above-median performers, are already outperforming most other balanced fund managers.
One way to potentially boost performance is to switch to a specialty structure in which the fund allocates its assets to specialty managers in each asset class, in the belief that these managers have the potential to outperform by virtue of their specialized expertise. Alternatively, the fund could restructure into some combination of specialty and index managers. In either case, the search will be more aligned with the fund’s objectives.
Failure to conduct ongoing monitoring – The replacement of a manager should be the outcome of an effective ongoing manager monitoring program. Unfortunately, not all pension plans maintain such a program. The plan sponsor should consider if the receipt of performance presentations by a manager—unconfirmed by an independent third party—constitutes an effective monitoring program. Furthermore, the sponsor should consider the advantages and disadvantages of a third-party review conducted by the same third party that initially recommended the incumbent manager. In the absence of a regular monitoring program, an ad hoc manager assessment should be completed prior to launching a manager search.
Manager search is about process. And the process is vital, since the cost to change managers is not trivial. Expenses include the costs of identifying the appropriate manager, the legal costs to establish the new relationship, the transition costs incurred to sell and re-establish the portfolio, the costs to communicate the change and the potential opportunity costs should the hired manager underperform the fired manager. Moreover, process is essential in terms of governance, as the plan’s fiduciaries have an overarching responsibility to have a sound basis for their decisions, including the decision to hire and fire managers
Hubert Lum is a senior investment consultant with Morneau Sobeco.
hlum@morneausobeco.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the January 2010 edition of BENEFITS CANADA magazine.