Matthew Feargrieve: Things to Know About Managing Third-party Relationships
3:54 PMWithin a delegated mandate, a customized investment strategy is developed for each plan, with various implementation options available to plan sponsors. An investment strategy can be implemented in different ways. We look at this from three perspectives:
- The choice between pooled funds and customized implementation
- Liability hedging implementation
- Accessing diversity
Historically, investments in specialist mandates, particularly in hedge funds and private markets, were satisfied by the fund of funds. They provided access to diversified and specialized investments in niche asset classes for governance constrained investors. In fact, some delegated mandates use the fund of fund solutions to implement an investment strategy.
When deciding whether to select a pooled fund or a customized portfolio, we believe plan sponsors should be mindful of:
1. Investment beliefs and restrictions. Investors should first consider their mission and investment beliefs, and the extent of risk specific to them. At the onset of a delegated mandate, the plan sponsor should consider any beliefs that need to be reflected in its investment arrangements (e.g., if the plan sponsor does not believe in active management in a particular asset class).
2. Access to opportunities. Either a pooled or a segregated approach should offer the same access to opportunities; however, plan sponsors should be aware of the range of different funds that are available. Some delegated managers already operate funds that cover the major asset classes, but a delegated mandate should make new opportunities accessible. The plan sponsor should understand the flexibility that each of the funds has in investing in new opportunities.
3. Portfolio construction and management. I believe a delegated manager needs to ensure a portfolio is sufficiently transparent so a plan sponsor can confirm that assets reflect overall investment objectives. We feel this can be accomplished by providing clear data and an understanding of risk and return, the managers' style, the concentration of positions, liquidity and leverage — both at an individual manager and the portfolio composite levels.
4. Costs. Fees and costs can materially influence a pension plan's outcome. The level of fees will vary depending on the implementation.
5. Liquidity. Liquidity describes the cost and ease of selling an asset. While the liquidity of underlying fund managers is largely dependent on the asset managers, a delegated offering's structure can also impact liquidity. When a fund of funds is used, additional liquidity considerations surface that are dependent on the delegated manager's terms or the funds used.
Bottom line. A large number of delegated management options are available to plan sponsors. Both the benefits of a customized option and the simplicity of a fund approach should be explored. Of course, with some delegated managers, it may also be possible to benefit from both by combining fund investments with a custom mandate.
Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience of advising managers of investment funds operating in the leading jurisdictions of the United Kingdom, Luxembourg, Ireland, and the Cayman Islands. He is qualified as a financial services lawyer in the UK and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Find out more about Matthew Feargrieve online here. You can find financial investment stories, updates, and expert opinion on the Matthew Feargrieve page here and also connect with him on the Matthew Feargrieve Linkedin page. You can also read the latest Matthew Feargrieve news here.
Don't forget to subscribe to the Matthew Feargrieve Youtube channel here:
0 comments