With the dislocation in credit markets, new opportunities seem to be presenting themselves just as quickly as they disappear. Can the heavy due diligence obligations and inevitable bureaucracy of large super fund boards keep pace with the demand for capacity-constrained managers? STEPHEN SHORE talks to the chief executives of several super funds about the challenges of juggling good governance with fast decision making.
At Australia’s largest and most sophisticated super funds, strategy decisions are typically the prerogative of the board of directors, while the daily investment decisions are delegated to an internal investment team. Super fund boards describe designing strategy and policy as an evolutionary process that develops as new market conditions and opportunities present themselves.
But before the authority to make investment decisions can be delegated, voluminous research is conducted and a strict set of protocol is applied to any new asset class. Depending on the asset class, this sort of due diligence can take months.
Increasingly, investment teams are beginning to find that some opportunities, such as those arising from the current dislocation in credit markets, cannot wait until the next monthly meeting. In the United States, Pensions & Investments reported last month that in the latest round of specialist fixed interest manager capital raisings, the deadline for commitments was set so tight that many of the pension funds missed out. The article quotes industry sources who believe that the world of institutional investment is about to change dramatically and permanently: “Even after the credit dislocation opportunity is over, competition for capacity-constrained alternative investments like private equity, hedge funds, real estate and infrastructure will remain fierce.
Access to the hottest managers and strategies will be dominated by the most sophisticated institutions with sizable internal staffs, ready cash and streamlined decision-making, leaving the vast majority of investors in the dust.” David Atkin, chief executive at the $13 billion industry fund Cbus, agrees that it helps for investors to be well resourced to take advantage of such narrow windows of opportunity.
But for Cbus, looking into these areas is something that has become a necessity as the fund has increased in scale and it has become harder to outperform. Atkin says Cbus has grown at 25-30 per cent annually for the last couple of years. “[As the fund has grown,] our governance model has certainly changed, and the fund has evolved; we’ve become aware that we need to take advantage of opportunities that require fast decision making,” he says. “One of our key projects at the moment is to determine what is the optimum governance structure to balance due diligence with the need to move quickly.”
Cbus has a system, known as a “circular resolution”, by which if it is determined that an opportunity exists that falls outside the strategy, the investment team can seek approval of the board without a formal meeting. “It is a situation that has occurred two or three times in the last six months,” Atkin says. “On one occasion, an opportunity was discussed, but the cut-off date for commitments fell between meetings. The due diligence was not complete; we were waiting on one last piece of information. As soon as that information was received the investment committee was able to get written approval from each of the board members and proceed.”
According to a recent article by asset consultants Watson Wyatt, funds are increasingly using a more dynamic approach to investment strategy and implementation. Many are prepared to move away from the historical practice of making investment decisions around dates in the diary set by board availability and opting instead for investment processes that have been delegated to either internal or external experts that can be implemented, as and when opportunities arise.
Asset consultant at Watson Wyatt, Andrew Grimes, says that funds with good governance have been able to move from being “calendar time” investors to “real time” investors. Being a long-term investor does not necessarily mean acting slowly, he says. “Long term, strategic opportunities can present themselves with a very short window of time to identify, evaluate and exploit.” At the $2.9 billion industry fund Westscheme, the seven-member board sets strict policy specifying the desired excess return and tracking error in any asset class, before delegating the implementation to its executives and the asset consultant, Access Capital Advisors. “Every time we look at a new area, the board distils principles that will guide the investing,” says Howard Rosario, chief executive officer at Westscheme.
Each decision must be ratified by the board, which meets once a month, but often this occurs after the commitment has already been made and the board can ratify decisions without waiting until the next meeting. Rosario says that if opportunities arise outside the policy with short commitment deadlines, they can be dealt with on a case by case basis, and a set of guidelines could be reached in as little as four weeks time. “But as a fund we do a lot of research,” he says. “Setting policy takes as long as the board of directors want it to take.”
Atkin at Cbus says that if a really great opportunity arose that needed turnaround in a couple of weeks, it could be done, but that is not the norm. “There’s a lot of work required to do due diligence,” he says. “And we don’t want to be reacting all the time.” Robin Burns, chief executive at the $4.2 billion industry fund equipsuper, says his fund can move if it sees an opportunity that needs to be enacted quickly, but the need to circumvent regular board process for an opportunity outside policy is not something that has arisen in the past few years. “I wouldn’t be concerned that we miss opportunities because of a lack of speed,” Burns says. “Moving in such a short time is not something you need to do often, if ever. If your asset consultant is doing their job, you should be aware of opportunities with enough time to conduct the proper due diligence.”
Michael Seton, chief executive at the $3 billion fund Agest, adds that funds should question why a manger is closing so quickly. “Are they trying to hurry something through?” he asks. “Perhaps the manager has been slow in its administration. You need to make sure you have enough information and don’t rush in.”
With an internal team you can make decisions quickly, Seton says. “But investment opportunities that crop up suddenly and close just as fast don’t really happen that often.”