SWFs to External Managers, Not Just About Performance

publicfundmonitor_exploringBottom line, if a fund manager is not performing in the long-run, meaning losing money or failing to at least meet the benchmark, there is a good chance the mandate will be terminated. Performance is usually the number one factor of how external managers are rated among public investors. It is hard to sell a non-performing manager to a board or council committee.

In the age of advanced financial products and services, external managers are going the distance to please their largest accounts. Good performance is not enough; money managers have been offering value-added services to their clients in terms of asset allocation, risk management, and knowledge sharing. In fact, many large asset managers and banks offer training to monetary authorities, sovereign wealth funds, and other long-term public investors. This willingness to share insight and processes increases business transparency.

Common Qualitative Factors Common Quantitative Factors
Client Service Performance
Firm Ownership Investment Style
Firm Growth Prospects Risk to Portfolio
Human Resources  
Investment Approach  
Business Risk Issues

Improved client servicing is paramount, especially in down markets. This is a major differentiating factor. Key deal breakers for external managers usually include a lack of consistent client communications. Public investors are under pressure from their boards on hitting their return targets, bad performance coupled with a flawed communication strategy is a recipe for being “black-listed”.

A change in key management or culture is also cause for external manager termination.

Official institutions and sovereign wealth funds will continue to award mandates, especially in areas where they lack resources to do it themselves. In 2000, the Central Bank of Brazil began to start using external managers when the bank had US$ 35 to 50 billion to allocate. The bank also has a program that works on a three-year performance cycle.

Last, many sovereign investors especially with passive mandates are concerned with performance consistency. Weighting return consistency would most likely be expected in fixed income or absolute return mandates. Investors like to look at the external manager’s convictions, investment processes, technology and adherence to the mandate.

Contact the writer or creator of this article or page.
Questions or comments: support(at)swfinstitute(dot)org
Follow on Twitter at @swfinstitute and @sovereignfunds
Learn, Attend and Network: Institutional Investor Events and Summits
Go Back: HOME: Sovereign Wealth Fund Institute

institutional investor investment mandates