Q. What criteria do you use to evaluate investment advisors?
A. When we look at an investment manager to include in the Program, we look at them from two different dimensions. The first is the manager’s investment process, results, and team to name a few criteria; the second is operational processes.
On the investment side, we’re focused on four forward-looking factors: idea generation, which is the resources and approach they have to actually generate distinctive new investment ideas to include in the portfolio. Portfolio construction: do they have a way of taking those ideas and thinking about them in a risk managed and judicious way, putting them together into the portfolio? Implementation: are they actually at a size where they can execute their ideas in a timely way, without having too big an impact on the market? And finally, but importantly, business management: do they have a strategy, and demonstrate a capability to align themselves with client needs?
We look for the potential of a manager to add value versus their peers or the benchmark. Our ongoing analysis of each manager includes performance against their peer groups. But we also evaluate the manager systematically, and have a regular performance and portfolio call with every manager in the Program. Independent of the investment due diligence, we also conduct operational due diligence on every strategy that we include in the Program. This review focuses on operating debts and their governance.
Our ongoing review of each manager includes reviewing the value added by the manager relative to its fees.
Q. How heavily do fees factor into investment advisor reviews?
A. Fees are an important consideration. They’re not a pre-screening factor, but once we narrow the potential candidates who we think have similar potential to create value, we’re focused on acquiring that at the lowest cost possible.
Q: What may make you decide to terminate an advisor?
A. It’s often a change within the manager’s organization that reduces our confidence in their potential to add value. This could include the loss of key personnel, a change in control, a significant change in their asset base, or anything else we see in the firm that’s inconsistent with our initial assessment of the strategy. As a fiduciary, Mercer’s governance policy is that we don’t use strategies that are not highly rated by our manager research team and that haven’t been reviewed by the operational due diligence team that I mentioned. So once we’ve engaged a strategy, if our research view on it has deteriorated, and the manager research rating has dropped, that result would be grounds for termination.
Additionally, we could actually terminate an advisor not because they’ve deteriorated, but because we see an opportunity to bring in another advisor for a similar assignment that we think could either enhance the overall quality, or reduce the cost of the Program.