What plan sponsors look for in a fund manager
One of the most important aspects of sponsoring a defined benefit (DB) or defined contribution (DC) pension plan is working with suppliers that are reliable, experienced and able to deliver the service that meets expectations.
When a plan sponsor hires a fund manager to oversee the investment performance of the funds in a plan, plan members assume that these managers have the “seal of approval” and the ability to provide anticipated returns.
Because plan members have varying levels of financial knowledge and expertise, rightly or wrongly, they look to employers to cover some of the traditional “homework” when it comes to choosing a fund manager.
Most plan sponsors recognize this and are conscious of fiduciary responsibilities to select the right fund manager, assess abilities and performance, and act when performance does not meet expectations.
When a plan sponsor starts looking for a new fund manager, the organization is probably not acting alone, but is working with a consultant or other advisor, who can help define the criteria, research potential providers, and assess service submissions. The things to look at include:
•Investment philosophy and process — What philosophy the fund manager espouses as a whole, what investment process is documented and followed, how well the performance history aligns with that philosophy, and how that philosophy aligns with the client organization.
•Key people — Specifically, who is overseeing investments and what is their experience.
•Fees — It is important to review this even though fee structure is likely determined by the kind of manager, the structure of the assets under management and the size of the asset base.
•Basic track record — The years of experience in managing investments, and at least five years of investment performance history.
Of these, perhaps the most difficult to assess is the last, since “good” performance can be subjective, and based on unreasonable expectations. The best way to evaluate performance is to determine objective measurement criteria, such as industry benchmarks that make sense for your plan, and track the performance of potential fund managers relative to these benchmarks.
Benchmarks commonly considered are the TSX index for equities, the ScotiaMcLeod bond index for bonds, the MSCI index for global equities or the S&P index for U.S. equities. It is reasonable to expect fund managers to have set themselves a performance target of at least the index, plus one per cent. While most plan sponsors look for a minimum of five years’ history, the more history available, the better.
Another factor to consider when reviewing performance is employee turnover. A fund manager may have a stellar investment history, but are the key members of the team responsible for that success still with the organization?
Finally, consider all of this performance history in the context of the market’s history. Market volatility and type of manager affect performance. Great market conditions for growth managers are not typically great market conditions for value managers. This is where working with investment advisors or consultants can really help a sponsor compare apples with apples.
Keeping an eye on your money
Choosing the fund manager is, unfortunately, not the end of the work. Sponsors must continue to evaluate manager performance on an ongoing basis.
All of the measures considered when looking for a fund manager should continue to be used in evaluating them moving forward. Large plan sponsors will likely have quarterly review meetings with the fund managers, but all plan sponsors should have annual review face-to-face meetings at a minimum.
These meetings give the fund manager an opportunity to speak to fund performance in the past year, outline any outside influences or other factors that may have affected that performance, and discuss any changes in their organization, such as personnel turnover or a change of corporate ownership.
These meetings are important because everyone is reminded that the sponsor is actively involved and “keeping an eye on” what they are doing with your pension money.
So how do you know when it’s time to move on? Changing a fund manager is not a decision to make lightly because it can be costly for the plan and disconcerting for plan members.
A new search costs money, and it may be necessary to liquidate securities with the old manager and buy new ones with the new manager. New service contracts have to be negotiated. Plan members have to be told about the change and the reasons for it. It will require a lot of time, effort and cost.
But good reasons for changing a fund manager can arise, and these go back to the evaluation criteria used in making the original selection.
•Has the corporate ownership or the investment philosophy of the fund manager changed?
•Have the key people overseeing investment changed?
•Have there been unacceptable fee increases based on the size of assets or the performance history of the manager?
•Have performance history and investment returns not fulfilled expectations?
•Has performance over a number of years met the benchmarks established for the plan? (This does not mean chasing returns and flipping from one manager to another every other year.)
If time is taken to establish these criteria when choosing the manager, and to review them throughout the ongoing relationship with that manager, it should be clear when it is time to move on. It is a difficult decision to change managers, but fiduciary responsibilities can make it a necessary one.
Even after an organization decides to change fund managers, the actual change won’t happen overnight. For DB plan sponsors, the transition can typically occur within three to six months. However, for DC plan sponsors, it could take a minimum of nine to 18 months, depending on the complexity of the plan design.
In addition, there’s the need to create and distribute member communications required to keep plan members informed about the plan. The bottom line: even though you have service partners to help manage the plan, the ultimate responsibility to oversee the performance of the plan remains with you.
Jacqueline Taggart is a principal in the communications practice of the Toronto office of Morneau Sobeco. She can be contacted at (416) 385-2119 or [email protected].
When a plan sponsor hires a fund manager to oversee the investment performance of the funds in a plan, plan members assume that these managers have the “seal of approval” and the ability to provide anticipated returns.
Because plan members have varying levels of financial knowledge and expertise, rightly or wrongly, they look to employers to cover some of the traditional “homework” when it comes to choosing a fund manager.
Most plan sponsors recognize this and are conscious of fiduciary responsibilities to select the right fund manager, assess abilities and performance, and act when performance does not meet expectations.
When a plan sponsor starts looking for a new fund manager, the organization is probably not acting alone, but is working with a consultant or other advisor, who can help define the criteria, research potential providers, and assess service submissions. The things to look at include:
•Investment philosophy and process — What philosophy the fund manager espouses as a whole, what investment process is documented and followed, how well the performance history aligns with that philosophy, and how that philosophy aligns with the client organization.
•Key people — Specifically, who is overseeing investments and what is their experience.
•Fees — It is important to review this even though fee structure is likely determined by the kind of manager, the structure of the assets under management and the size of the asset base.
•Basic track record — The years of experience in managing investments, and at least five years of investment performance history.
Of these, perhaps the most difficult to assess is the last, since “good” performance can be subjective, and based on unreasonable expectations. The best way to evaluate performance is to determine objective measurement criteria, such as industry benchmarks that make sense for your plan, and track the performance of potential fund managers relative to these benchmarks.
Benchmarks commonly considered are the TSX index for equities, the ScotiaMcLeod bond index for bonds, the MSCI index for global equities or the S&P index for U.S. equities. It is reasonable to expect fund managers to have set themselves a performance target of at least the index, plus one per cent. While most plan sponsors look for a minimum of five years’ history, the more history available, the better.
Another factor to consider when reviewing performance is employee turnover. A fund manager may have a stellar investment history, but are the key members of the team responsible for that success still with the organization?
Finally, consider all of this performance history in the context of the market’s history. Market volatility and type of manager affect performance. Great market conditions for growth managers are not typically great market conditions for value managers. This is where working with investment advisors or consultants can really help a sponsor compare apples with apples.
Keeping an eye on your money
Choosing the fund manager is, unfortunately, not the end of the work. Sponsors must continue to evaluate manager performance on an ongoing basis.
All of the measures considered when looking for a fund manager should continue to be used in evaluating them moving forward. Large plan sponsors will likely have quarterly review meetings with the fund managers, but all plan sponsors should have annual review face-to-face meetings at a minimum.
These meetings give the fund manager an opportunity to speak to fund performance in the past year, outline any outside influences or other factors that may have affected that performance, and discuss any changes in their organization, such as personnel turnover or a change of corporate ownership.
These meetings are important because everyone is reminded that the sponsor is actively involved and “keeping an eye on” what they are doing with your pension money.
So how do you know when it’s time to move on? Changing a fund manager is not a decision to make lightly because it can be costly for the plan and disconcerting for plan members.
A new search costs money, and it may be necessary to liquidate securities with the old manager and buy new ones with the new manager. New service contracts have to be negotiated. Plan members have to be told about the change and the reasons for it. It will require a lot of time, effort and cost.
But good reasons for changing a fund manager can arise, and these go back to the evaluation criteria used in making the original selection.
•Has the corporate ownership or the investment philosophy of the fund manager changed?
•Have the key people overseeing investment changed?
•Have there been unacceptable fee increases based on the size of assets or the performance history of the manager?
•Have performance history and investment returns not fulfilled expectations?
•Has performance over a number of years met the benchmarks established for the plan? (This does not mean chasing returns and flipping from one manager to another every other year.)
If time is taken to establish these criteria when choosing the manager, and to review them throughout the ongoing relationship with that manager, it should be clear when it is time to move on. It is a difficult decision to change managers, but fiduciary responsibilities can make it a necessary one.
Even after an organization decides to change fund managers, the actual change won’t happen overnight. For DB plan sponsors, the transition can typically occur within three to six months. However, for DC plan sponsors, it could take a minimum of nine to 18 months, depending on the complexity of the plan design.
In addition, there’s the need to create and distribute member communications required to keep plan members informed about the plan. The bottom line: even though you have service partners to help manage the plan, the ultimate responsibility to oversee the performance of the plan remains with you.
Jacqueline Taggart is a principal in the communications practice of the Toronto office of Morneau Sobeco. She can be contacted at (416) 385-2119 or [email protected].
