(Pictured: Ron Liling)
Comment by Greg Bright
Ron Liling once famously said, after he had sold and had considered buying back InTech Investment Consulting, that “manager selection is a mug’s game”. Recent events, including some new international research, support this view.
Liling founded InTech in the 1980s with his old school friend John Schaffer. The pair made a handsome profit when they exited nearly 20 years later. These days Liling dabbles in property and Schaffer is a third-party marketer. In its current iteration, InTech, which also had multi-manager funds, is part of Morningstar.
When he was asked to consider buying back the asset consulting part of the business from the then Skandia (now part of Old Mutual), Liling asked permission to speak with some key clients about a new type of consulting firm, whereby the researchers would concentrate on investment strategy and asset allocation, new ideas and opportunities to really add value. The new firm would not bother itself with manager research and selection. In the end, the seller didn’t want to muddy the waters like that and the company was sold as a whole to Morningstar.
Chris Condon said something similar when he left MLC, where he was CIO, to set up his own advisory business, which has morphed into a member education service. Condon had been the head of investment consulting at Russell, too. He said, words to the effect: the most important thing advisors can do is help the trustees make the big decisions, which are all to do with asset allocation.
And, more recently, Graeme Miller, the head of investments for Towers Watson, was asked about the firm’s move last month to make redundant its position of head of manager research in Australia, previously held by another former InTech CIO, Hugh Dougherty. Miller said that manager research and selection, combined with portfolio construction, could add value. However there was no doubt that this was down the list compared with the added value from asset allocation.
Towers Watson decided to better integrate its manager research with its international operations and spread the task among consultants. One senior consultant, Ross Barry, had, prior to that restructure, decided to become a contractor at Towers Watson, rather than staff, partly because he didn’t want to do manager research any more.
And, finally, there’s the new research. Two academics at the Said Business School, University of Oxford – Tim Jenkinson and Jose Vicente Martinez – together with research assistant Howard Jones, published a paper in September which caught not only the attention of the institutional investment world, it was also picked up by the New York Times’ ‘Dealbook’ news service which normally concentrates on investment banking activities.
In summary, the researchers said: “We examine the aggregate recommendations of consultants with a share of over 90 per cent of the US consulting market. We find that consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows, but we find no evidence that these recommendations add value to plan sponsors.”
The research is suspect in both its underlying assumptions and methodology and, because of the ensuing publicity, controversially unfair on the consulting fraternity. For instance, to describe non-historical-performance factors as “soft” is absurd and flies in the face of decades of education about investment performance. Also, the research mixed retail data, such as that from Morningstar, with institutional data, such as that from Greenwich Associates.
The sole focus of the research was the value of manager selection recommendations based on 13 years of information analysed, covering about US$13 trillion in assets. But the researchers were unsure how much represented “actual recommendations”, relying on Greenwich surveys for that. And even without that question mark, to come up with a finding that there was no evidence to suggest manager selection recommendations add value should not surprise anyone. The best you can expect is to avoid the really bad managers and come out with a slightly-better-than-even average over the very long term.
If there was a plus to come out of this it is for trustees and fund executives to think more about the effort they put into asset allocation and other larger fund governance issues rather than fund manager selection.
As Towers Watson and the other major global asset consultants have been advising for years, funds should spend significantly more of their governance budget on the high-level decisions. It’s a variation on the old advice: ‘don’t sweat the small stuff’.