Music of a different tune is now finding its way into the investment management consultant space. Whereas previous measures of investment manager suitability were based largely around past performance, international and European consultants are now increasingly looking to different methodologies when advising clients on the most appropriate investor of assets.
Consultants may not be a new and sexy option for institutional investors and pensions to leverage off, but their role in the overall selection process of investment managers is transforming who manages assets. Essentially, they are hired by clients to pick the best of the best and to match specific portfolio requests and investment attitudes. The industry is sometimes criticised by members of the finance industry as holding too much sway over clients, a fact that consultants themselves stress is simply not true, as evidenced by their increasing scope of business and clients.
According to consultants, their collective popularity drive is a result of a different view of asset managers held by most institutional investors and other funds.
Whereas clients will routinely point to past performance as one of the pinnacle elements of manager selectors, experts from the consultancy world believe this has become a rather irrelevant facet of their processing. "We believe that the previous track record is a pretty meaningless guide to future performance," says Ric van Weeldon, a partner at Watson Wyatt. "Every track record is a combination of skill and luck. Going forward, the criterion we are using is more qualitative and in our business, this fact is very difficult to ignore."
As expected, different consultants look for different qualities and strengths from asset managers, but now unilaterally appear to shun past investment strength as an indicator of high future returns. Creativity and execution of newer investment ideas now holds a greater credence for consultants, as does retention of quality staff and a stable operating environment.
"We do not look for past performance, instead we take a more positive view on prospects for future upward performance," says Hanne Hother, senior investment consultant, Mercer Investment Consulting. "In the future, we will be increasingly looking to those firms that can generate investment ideas and whether or not these managers will be able to construct and implement new ideas into the portfolio. We will also look favourably on the organization of research and how it is different to competitors."
According to members of Europe's most respected investment consultant companies, they now look at past performance as merely a sign of the times and that finding a suitable manager has become increasingly difficult as a result of this principle. Nowadays, methodologies of managers are seen as highly imitated and when overused allocations under perform, clients find the process of making hiring and firing decisions increasingly difficult, thus explaining the growing market for investment consultants.
"It is difficult to find the right managers and more commonly, the problem is that most mangers have imitated the good recipes," suggests Hartmut Leser, managing director of Feri Institutional Management. "It's difficult to rely on past performance and as our job is to add value to the client, we tend not to choose the same recipe."