ESG – Industry view


HUNTING FOR AN EXCEPTIONAL ASSET MANAGER


David Cox is head of listed markets at Brunel Pension Partnership


When it comes to asset manager searches, you can never afford to compromise on due diligence – no matter the asset class. But as the ESG movement grows ever larger and reshapes ever more portfolios, some institutional investors may make the mistake of


separating responsible


investment (RI) or ESG criteria from their manager selection processes. In fact, inte- gration is crucial.


This year we have conducted multiple manager searches


and gained ample


experience to ensure we implement RI principles right through the selection pro- cess – and to reflect on whether they worked through monitoring. Fundamentally, the goal should be to iden- tify high-quality stewards of capital capable of delivering your clients’ desired out- comes. We offer some dos and don’ts below, which we hope will offer institution- al investors some tips on process when it comes


to manager appointment, and


might help the odd aspiring manager, too. Our clients ensured RI was at the heart of our investment decision-making from the outset, and so we hope our experience can help others to fully integrate RI into asset manager searches too. If you are not inte- grating RI now, the current pace of change may mean you get left behind.


Application process


Due diligence applies across the board and we always want to receive the widest possible array of suitable submissions. However, this demands clarity and brevity on the part of applicants: they should avoid clichés and waffle! Those selecting managers should scruti- nise strategies to identify managers who offer a sustainable competitive edge. Per- formance is not screened in isolation. Rather, we look for evidence that manag-


ers can meet our targets within all the risk parameters we set. Above all, we expect managers to demon- strate an openness to exploring new ways of monitoring and managing environ- mental, social and governance risks. DOs – here’s what we like: – Show good exam technique! We like managers who think about why we were asking the question. We dislike obvious stock answers from RfP databases, prefer- ring to hear direct from the investment team instead. – Show evidence of how the strategy is advancing the cause of responsible investing and how the manager is chal- lenging themselves to develop their approach.


– Provide evidence of performance based on a minimum three-year track record, preferably longer, so we can judge your team’s capability. If the proposed strat- egy is not an exact match for what is sought, managers needed to be clear about the difference and the rationale for its inclusion.


– Demonstrate where the strategy’s return profile differed to reasonable expectations (given market perfor- mance), and for managers to explain the deviation if necessary.


– Discuss the impact of reduced liquidity on the proposed portfolio when volatil- ity rises and the typical response func- tion of the team.


– Explain the interactions between the investment team and investment risk function, offering examples of inter- ventions made and their impact as well as outlining resources available and reporting lines.


– Charge fees commensurate with the level of benefit offered by the strategy.


DON’Ts – some things to avoid Even if strategies meet stringent criteria, any of the following features could result in rejection: – Reluctance to make the changes needed to support our existing critical policies. Take our Climate Change Pol-


icy, for example. If there is no flexibility to meet us on something so central, it is not going to work out.


– A tendency to rebrand existing strate- gies, to “greenwash” them, or to hide the true track record.


– Failure to quote fees, or else not mak- ing them easy to find, especially where there were additional charges in very small print.


– Cherry-picking favourable starting points for the performance track record and providing out-of-date data to obfuscate less favourable recent performance.


– Failures to align fund’s own bench- mark to its strategy.


– Realised returns falling short of a man- ager’s own target or of our target with no explanation, and no detail on how the target might still be deliverable.


A culture of partnership and innovation A culture match is crucial, no matter who is appointed as manager. At Brunel, we place great emphasis on our investment principles and seek to work with manag- ers who foster a positive, inclusive cul- ture, encourage debate and challenge, learn from mistakes and provide appro- priate incentives.


As stated in our Asset Management Accord: “Brunel demands high standards of transparency from the companies and organisations it works with.” This expec- tation underlies our selection process, as well as our relationship with appointed managers. We require our managers to align with us through the Accord and to be open to adapt and innovate in partnership with us. To get to the nub of this, we recom- mend strong vetting and lines of ques- tioning that may even feel intrusive. But if you set out to establish a strong, long- term


partnership, it means ensuring


alignment on matters of fundamental importance. Happy hunting!


Issue 104 | June 2021 | portfolio institutional | 21


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