Investment managers who don’t beat benchmarks might still add value in the long-term.
Benchmarks are tricky things. That’s especially true when they bake in a lot of underperformers, like the S&P 500. If the manager is going to match up to the benchmark, acceptance for some underperformance may be required.
So in managing external managers, how then does a treasury investment manager decide which one to fire, and which to keep? Well, short-term returns aren’t the most important thing, at least according to members of The NeuGroup’s Treasury Investment Managers’ Peer Group, which is meeting today and tomorrow. Rather, the key is the investment manager’s alignment with the company’s investment philosophy.
Now, that sounds appealing but hard to benchmark. But there are a number of criteria that the TIMPG identified that help treasury determine what is a good relationship beyond investment performance. Here are a few:
- Access: Many investment managers don’t want to give corporates the transparency they seek. But information about investment decision-making allows treasury to share ideas and critique different investment managers’ trades or strategies. A partnership is crucial.
- Compliance track record: This is where an investment manager has to be whiter than white. Managers often go to investment management personnel to get sign-offs on trades that are outside guidelines. But why hire a firm that does this on a regular basis – and risk hurting your relationship with the boss?
- Operations efficiency: A dozen managers might generate 150 trades or more a day. That takes a couple hours, at least, to enter into a portfolio system. So it’s important that this information comes in an electronic format that plays well with treasury’s systems.
- Quality of Mindshare: Treasury often has to ask a lot of questions of its external managers, so in addition to access, it is important to know what sort of mindshare is available. This can be a function of how many analysts the firm has? How long have they been there? How and how much are they paid, and how much of the cash they manage is corporate cash?
Assessing external managers on these criteria can go a long way toward determining whether there’s a philosophical match.