Discretionary vs. Non Discretionary Services Which Approach is the Best Fit for Your Organization?

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1 Discretionary vs. Non Discretionary Services Which Approach is the Best Fit for Your Organization? Matthew R. Veith Senior Vice President Gary R. Price Managing Principal Head of FEG Managed Portfolios

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3 KEY TAKEAWAYS Success can be achieved with either approach There are advantages and disadvantages to both approaches Discretionary approach is growing Several nuances within the discretionary approach important to understand them Main considerations determining suitability: Time Resources Committee structure/composition/dynamics Portfolio size and complexity 2

4 THE OVERSIGHT STRUCTURE IN HOUSE COMMITTEE DRIVEN OUTSOURCED GOVERNING FIDUCIARIES MANAGING FIDUCIARIES Investment Committee CIO and Staff Investment Committee, Staff & Consultant Supporting Fiduciary Investment Committee Outsourced CIO OPERATING FIDUCIARIES Investment Managers Custodians Actuaries Other Vendors Investment Managers Custodians Actuaries Other Vendors Investment Managers Custodians Actuaries Other Vendors Source: Pension Fund Excellence. Authors Keith Ambachtsheer & Don Ezra 3

5 DIFFERENCES IN RESPONSIBILITIES NON DISCRETIONARY Consultant Client Set Asset Allocation Targets Recommends Approves Investment Policy Statement Recommends Approves Implementation/Rebalancing Recommends Approves Manager Selection Recommends Approves DISCRETIONARY Outsourced CIO Client Set Asset Allocation Targets Recommends Approves Investment Policy Statement Recommends Approves Implementation/Rebalancing Implements Monitors Manager Selection Implements Monitors 4

6 ASPECTS OF EACH APPROACH NON DISCRETIONARY DISCRETIONARY Implementation of Recommendations Typically slower or more time intensive Seamless Client Control More Less Accountability of Performance Mixed Clearer Formal Oversight of Assets Quarterly/frequency of meetings Daily Committee time required More Less Client Back Office Responsibilities More Less 5

7 CIO OUTSOURCING MODELS Outsourcing solutions are currently delivered in three main ways Outsourcing Delivery Models Fully Customized Mass Customized Total Portfolio Solution Target Market Corporate: $500M+ Corporate: <$500M Not - for - profit: $250M+ Not - for - profit: <$250M Not - for - profit: <$250M Portfolio Management Outcome - driven High touch: ~5-10 clients per senior investment professional Manager - research focused Leverage centralized team: ~15-25 clients per investment professional Focused on performance Single product managed by senior investment professional Components Single manager exposures, including direct investments Some exposure to pre - packaged products Mainly pre - packcaged products Legacy multi - manager products Single investment vehicle Sources: 2011 Outsourcing Survey, 2009 Outsourcing Survey, Pensions & Investments and Casey Quirk analysis 6

8 INDUSTRY TRENDS Level of Discretion Percent of Clients By Size Cohort <$250mm 43% 46% 10% $250mm-$1B 41% 51% 8% >$1B 32% 53% 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Full Partial Minimal Source: 2011 Casey Quirk Outsourcing Survey 7

9 INDUSTRY TRENDS AUM ($B) AUM ($B) $600 $500 $400 $300 $200 $100 $- $600 $500 % of Total Market: 7.6% Outsourcing Market AUM Growth Forecasted E $216 $400 $194 $172 $216 $150 $194 $300 $127 $172 $105 $150 $127 $200 $105 $153 $175 $197 $219 $241 $263 $153 $175 $197 $219 $241 $263 $100 $ % % % % % 2015 Corporate Not-for-Profit Corporate Not-for-Profit Note: Analysis excludes partial outsourcing (<80% of client assets). Assumes capital appreciation of 6-7%. Sources: 2011 Outsourcing Survey, 2009 Outsourcing Survey, Pensions & Investments and Casey Quirk analysis 8

10 AUM ($B) INDUSTRY TRENDS Outsourcing Market Size by Segment Forecasted E $180 $160 25% $140 17% $120 $100 18% $80 $60 4% 4% 43% 12% $40 $20 32% 33% 30% 2% 3% $ Small Mid-Sized Large Small Mid-Sized Large # of Clients: Corporate Not-for-Profit KEY: Corporate-Small <100mm, Medium $100mm-$18, Large $18+ NFP-Small <$100mm, Medium $100mm-$18, Large $100B+ Percentages indicate outsourcing as a percentage of the total market segment Note: Analysis focuses on full portfolio outsourcing (80%+ of client assets). Assumes capital appreciation of 6-7%. Sources: 2011 Outsourcing Survey, 2009 Outsourcing Survey, Pensions & Investments and Casey Quirk analysis 9

11 REASONS FOR INDUSTRY GROWTH Lower return environment Complexity Volatility Manage risk Exploit opportunities Managers How many? Active vs. Passive? Alternatives? Fund of funds, direct, combination? 10

12 PORTFOLIO STRATEGY SOLUTIONS Improve decision making process Ensure timely implementation Define decision rights Effective use of time Willingness to be contrarian 11

13 FREQUENT CONSIDERATIONS / COMMENTS Fiduciary Responsibility Do fiduciary responsibilities change by delegating some decision making? Fiduciary responsibility cannot be fully delegated Each approach accepts fiduciary responsibility Question becomes which approach is more effective for your organization? Managing Fiduciary (i.e. Discretionary approach) Supporting Fiduciary (i.e. Non-Discretionary approach) 12

14 FREQUENT CONSIDERATIONS / COMMENTS Common responses from clients that have transitioned from non-discretionary to discretionary approach: Let FEG do what it does best Monitoring FEG s value add becomes easier and thus is a more effective way to govern Back office / operational support is beneficial 13

15 FREQUENT CONSIDERATIONS / COMMENTS Common responses from clients that have considered discretionary but stayed with non-discretionary approach: Not ready to give up control Decide to meet for frequently / devote more time to investments Become more open to investment recommendations 14

16 FREQUENT CONSIDERATIONS / COMMENTS Oversight of Discretionary Firm? A clear and well defined investment policy statement is an effective tool to set expectations for all parties Industry studies (e.g., NACUBO, COF Study, FFOG, et al) can be used to assess performance versus peers Transparency Flexibility Liquidity Fees - Experience Full transparency into underlying managers and rationale for any changes should be expected Flexibility should be considered, especially regarding any illiquid investments Liquidity develop liquidity analysis to verify assumptions & establish guidelines Fees comprehensive, all in analysis Experience proven track record and adequate resources of discretionary firm 15

17 CONCLUSION No one size fits all answer as each organizations has different needs, structures personnel and comfort levels Evaluating your current structure with the information provided should illuminate which approach is the best fit for your organization Main organizational considerations determining suitability: Time Resources Committee structure/composition/dynamics Portfolio size and complexity FEG Managed Portfolios approach features: Flexibility Transparency Liquidity Proven expertise 16

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19 QUESTIONS AND ANSWERS 18

20 DISCLOSURES This presentation was prepared by Fund Evaluation Group, LLC (FEG) an investment adviser registered under the Investment Advisers Act of 1940, as amended providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. FEG, its affiliates, directors, officers, employees, employee benefit programs and client accounts may have a long position in any securities of issuers discussed in this report. Past performance is not indicative of future results. Any return expectations provided are not intended as, and must not be regarded as, a representation, warranty or predication that the investment will achieve any particular rate of return over any particular time period or that investors will not incur losses. This report is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH Attention: Compliance Department. 19