For an asset owner, overcoming resistance from their external portfolio managers can be an uphill battle. Although subject to a mandate’s terms, managers can sometimes wield outsized influence in the investment chain compared to often resource-strapped clients.
Take the ongoing spat between UK pension fund trustees and asset managers who have refused to allow client-directed voting on shares held in pooled funds.
Despite a three-year campaign by trustee body AMNT and the high-profile backing of Pensions Minister Guy Opperman – who has called such practices “utterly unacceptable” and “obstructive” – the impasse has continued.
At the other end of the spectrum, though, things look very different.
The Ireland Strategic Investment Fund (ISIF), the $24bn national fund, credits its “deeper relationships” with managers as “invaluable” and essential to its strategy.
In 2014, ISIF transitioned a global, mainly passive equities portfolio to an actively-managed domestic portfolio to help generate economic growth.
As part of the transition, ISIF closed 10 mandates, whittling down 20 fund managers to 13.
Out of this total, three managers responsible for critical mandates under the Irish portfolio were designated as “strategic partnerships”.
For the self-described “under-resourced” ISIF, the benefit was twofold: Having a small cluster of fund managers requiring enhanced oversight used less resources – and these relationships were seen as untapped opportunities for knowledge sharing and collaboration.
Elaborating, Emma Jane Joyce, ISIF’s Head of Responsible Investment, said: “Access to research is extremely important to a number of colleagues in our Irish portfolio, particularly in the food & agriculture sectors, private equity and real estate. If we’re looking at a particular investment opportunity, say a real estate model in Denmark, we want to be able to bounce it off our managers and tap their experience and capabilities in the area.
“We also require broad access to research. Through our managers, we can access online portals where we can utilise macro or stock-specific research. There is also a requirement to assist with portfolio modelling, should our objectives and constraints change.
“Recently, we’ve had managers come in to do leadership and high functioning teamwork training for our equity team, which is a non-mandate-specific example of how we can leverage their capabilities.”
To ensure their needs were met, these expectations were embedded into manager contracts.
Joyce explains: “We have sections in our mandates called “Additional Services” which include our requirements for knowledge sharing, client training, portfolio modelling, access to research capabilities – for example – that the investment managers say they will endeavour to perform.
“These aren’t explicit commitments but we did build them into contracts to give us comfort, though of course these are subject to caveats around reasonable endeavours and regulation-mandated Chinese walls.”
The advantages of strategic partnerships came to the fore recently when ISIF was directed by parliament to divest companies profiting from coal, oil, gas and peat. Due to the specific wording of the legislation, off-the-shelf products were deemed unsuitable.
ISIF’s managers and a separate third-party analytics provider were both requested to submit a list of stocks within the fund’s investing universe which would be in breach of the directive. In the end, the internal submission was significantly wider than the externally sourced list due to a deeper understanding of the Fund’s investment approach.
ISIF was first introduced to strategic partnerships after a chance meeting with the New Zealand Superannuation Fund.In 2010, NZ Super underwent a move away from a conventional strategic asset allocation in favour of an opportunistic, asset class-agnostic approach. This allowed for more complex, active strategies such as strategic tilting and investing in private or illiquid assets.
According to Del Hart, NZ Super’s Head of External Investments and Partnerships, knowledge sharing with managers was crucial to “inform research priorities and provide investment ideas”. At the same time, the increased risk necessitated increased oversight of strategic partnerships. For this the fund leveraged its responsible investment capabilities.
She said: “A while ago the RI team was brought into the investments team and its head [Anne-Maree O’Connor] now sits on the Investment Committee. When we invest in high risk sectors, we feel it’s appropriate to engage our RI team for extra support and make sure we’re covering all the bases, so it really depends on materiality.
“Both teams now work very closely together and individual members of the RI team have their own areas of focus, whether that may be direct or external investments. It’s more challenging to achieve ESG integration if the RI professionals sit outside of the investment team.”
The Fund views RI capabilities as a proxy for risk management and awareness, thus all managers have an RI plan which contains an RI competency assessment, indicated by a current score, and a target score. Where there is a gap between the two, a specific engagement plan is put into place.
Monitoring of NZ Super’s three strategic partnerships and remaining managers is carried out through a stringent reporting regime throughout the life of a mandate. According to Hart: “In the last 2-3 years we have started putting clauses in our legal agreements requiring ESG reporting. There was a little pushback to start with, but our managers knew that agreement was a crucial prerequisite to the mandate.”
“One manager in a high-risk sector was reluctant to provide the additional reporting at first but have since come back to us, saying that similar reporting has been rolled out across their other funds. They’ve now seen the value and have received positive feedback from other clients. It’s hard for us to assess the risk, if they aren’t being reported on post-investment.”
For both ISIF and NZ Super, the benefits of strategic partnerships are relatively unstructured and cut across the entire investment function. Other asset managers have had success adapting the model to suit more focused, project-based concerns.
Swedish pension buffer fund AP7 first partnered with asset managers in 2013 after it identified a need for a bespoke ESG approach to private equity. In a three-year project, AP7 and managers Hamilton Lane Advisors, LGT Capital Partners and HarbourVest Partners built on existing academic research and incorporated norms-based screening, engagement and exclusions into a structured ESG methodology. The resulting framework was given to the PRI where it is now freely available.
AP7’s Head of ESG, Johan Florén, said: “We’ve worked together with these managers for a number of years, we knew each other pretty well so there was a certain trust. When you don’t know each other, everyone naturally has their guard up. Without this collaboration, something would have come out of it but not as good as what we have today.”
AP7 is now working on a second collaboration, this time with Impax and KBI Global Investors. In addition to managing a green equity impact fund, the managers are to develop metrics and methodologies which measure investment impact. These will also be made freely available.
According to Florén, manager selection is key to the partnership success. He says: “We are satisfied with our selection of Impax and KBI GI.
“Some of the managers we considered are more known for their sustainability and impact credentials rather than their asset management capabilities and we did not want that. Our assessments were not limited to performance but also their administrative and other practical capabilities.”
Surely these ‘strategic partnerships’ cost more?
Florén said: “We did not pay extra. As an impact investor, you have financial and non-financial targets, and therefore you must have some way to evaluate both, so it’s not like they [the managers] have to come up with something new. We thought this was a good time for us to contribute to this area as there is no currently established methodology.”
Similarly, neither ISIF nor NZ Super pay extra.ISIF’s Emma Jane Joyce says that, rather, partnerships are indicative of “a shift in the investment industry, moving from product-based solutions to more strategic partnerships to suit more diverse client requirements”.
It’s worth noting that the asset owners featured here no longer retained the services of investment consultants after entering into partnerships.
But Joyce does concede that “managers are keen to work with sovereign wealth funds and perhaps that has given us the leverage to request solutions which meet our needs”.
“That’s probably the key differential for other funds who are considering this collaborative model as well as it may entail additional fees or something like that.”