(Pictured: Leigh Gavin)
For years fund managers have spoken about having ‘partnerships’ with their super fund clients, but it is only in the past few years, first in the US and now Australia, has the idea developed its own special forms of contract between the parties. Frontier Advisors has produced an interesting paper on the growing phenomenon.
The paper (view here) written by senior consultant Leigh Gavin, details the celebrated multi-asset partnerships of the US$120 billion Texas Retirement System (Texas Teachers) and the US$55 billion Alaskan Permanent Fund. The Alaskan fund has what it calls “external CIO partnerships” with five big managers and Texas Retirement has a “public markets strategic partnerships network” with four (previously five) different managers in which the fund sets the asset allocation ranges for the multi-asset strategies. Texas Retirement also has private market partnerships with two PE managers.
Both funds’ websites are worth a look. With the Alaskan fund, the 80-page investment policy PDF is very detailed. The Texas fund is a bit more user friendly once you get past the home page and go to “general information” then the “investments” tab.
One of the interesting comments in the Frontier paper, though, is that you don’t have to have a big chequebook to develop a strategic partnership. Also, the partnership does not have to be multi-asset either; it can be for a single asset class such as Australian equities with a boutique start-up or global equities with an Australian or New Zealand firm with a lot of capacity. Or, the author thinks, an alternatives manager may deliver the best results from such a partnership.
But it’s the multi-asset strategies which are attracting most interest. Gavin says that a number of super funds have moved to multi-asset relationships with managers, which will often allow the manager to manage dynamic asset allocation (DAA). Going a step further, the manager can be set some “challenges”, such as giving the manager the same long-term real return objective as the fund, with a sensitivity to negative returns and fee and liquidity requirements. This was the genesis of the Texas Retirement approach.
Gavin says: “An ideal strategic partnership creates solutions for the client within a broader relationship, either at the manager or client’s instigation. For example, the client may indeed initiate and seed-fund a new idea, for instance a product that doesn’t currently exist, perhaps for a certain solution for “moment in time” allocations, which may benefit both sides of the relationship, as it should enable the manager to more easily fund raise with subsequent investors.”
Gavin says that the three main drivers of the increasing popularity of strategic partnerships seem to be a willingness to reduce the number of manager relationships, reduce fees and an increasing appetite for the transfer of intellectual property.
He says that the greatest “wins” may come from relationships with specialist managers, such as in the alternatives or private markets space, where synergies and economies of scale have been lacking compared with the broad markets.
He concludes: “A critical question exists for a fund to ask who ‘owns’ strategic partnerships within the organisation, for instance, who decides to focus on new strategies with existing partners ahead of “best of breed” manager options within each sector or sub-sector.
“As the industry moves down a path of increasingly tailored solutions for specific clients, strategic partnerships are a natural evolution to facilitate the “next solution”, which may come from within a pre-existing strategic partnership.
“Ultimately, a strategic partnership is likely to be whatever the fund makes it.”
– Greg Bright
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