By Bryan Richardson and Dwight Cass
Raw performance figures are not the only benchmark—or the most important—for determining whether a manager is world class.
How do you decide if your external money manager is delivering value? According to dialogue at The NeuGroup’s meeting of its Treasury Investment Managers’ Peer Group last month, there are a number of other useful benchmarks that can be used to evaluate your managers.
One world-class corporation with significant cash to invest explained its two-stage scorecard approach. Each quarter, this technology firm prepares a prior-quarter scorecard and one for the trailing two years. The company developed a scorecard process that, in addition to being used for monitoring managers, gives it security as it reduces the amount of focus on them and places more on the managers. However, once managers are hired, they are measured in three key areas:
Access and partnership. Access to manager knowledge is often more important than performance, the managers at this company explained. They expect their managers to share their knowledge of the markets and securities openly and readily. There initially was a bias toward large managers in relation to access, believing there would be more information available. But the company learned that large managers are generally less transparent than smaller managers. “We wanted to grade managers on how much information they gave to us, to make us look smart,” an investment management specialist from this company explained.
Oddly, despite this company’s significant investable cash, big managers weren’t ready to give it more transparency. At first, therefore, gaining access to information and compliance with investment guidelines were more important than performance. Eventually, the company graded managers on how much information they gave to it. This allowed the corporate investment specialists to compare strategies and tactics across external managers, making the company a nexus of information. “This made us look smart, and helped us evaluate what they were pitching,” one treasury official said.
Compliance. The objective with this measure, aside from the obvious one of not breaching policy, was to “keep [the company] from looking dumb.” There is a hassle factor associated with compliance breaches where they have to be documented, explained to management, and audited, etc., and then get a sign off on the breach. “Why would you hire a manager that has too many compliance violations?” the investment management specialist asked, rhetorically.
Operations. Operational excellence also is a big priority. The purpose of this measure is to ensure the job for the company is no harder than necessary. As the investment management specialist noted, the company can have up to 150 trades a day, which can take hours to enter into its internal systems. Therefore, it doesn’t want to spend its time following up on errors from its managers.
CAPTURING INFORMATION
To track the performance of managers over the quarters, the company set up a Wiki where the team writes comments, good and bad, about its experiences with each manager. When it’s time to prepare the quarterly scorecard the team reviews the entries in the Wiki with the understanding that if something isn’t entered in the system, it didn’t happen. But even with the Wiki, another investment specialist at the company noted, “You have to acknowledge that you can’t be fully objective because you’re human.”
This company has certainly terminated managers but its executives contend that “You should never fire a manager strictly for performance. We have tolerated underperformance and seen some of our worst managers become some of our best.”
And the company does manage some cash in-house. “We do have overlap but the internal outperformance might be from info we get from the external managers. The board doesn’t care if we’re doing better, but does care if we’re doing worse,” the treasury investment manager said.
That’s another big advantage in being able to get best-of-breed information from a number of external managers—it allows the internal managers to do their jobs better.