Shining a Light on Shadow Searches - eVestment · Shining a Light on Shadow Searches What Managers...

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1 Shining a Light on Shadow Searches What Managers Can Do to Succeed

Transcript of Shining a Light on Shadow Searches - eVestment · Shining a Light on Shadow Searches What Managers...

Page 1: Shining a Light on Shadow Searches - eVestment · Shining a Light on Shadow Searches What Managers Can Do to Succeed. 2 In the past few years, there has been a significant shift in

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Shining a Light on Shadow SearchesWhat Managers Can Do to Succeed

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In the past few years, there has been a significant shift in how institutional investors and consultants are approaching manager selection and research. Open calls for RFPs are becoming less common as consultants and investors are using databases to pre-screen managers, create shortlists and invite only a select group to participate in the RFP or finals process.

Asset managers may not even realize this process is happening behind the scenes until they are notified they are being considered for a mandate – or find out they missed one. This practice has been referred to in the media as a “shadow search.” While the traditional RFP process is unlikely to disappear anytime soon, using databases to create initial shortlists of managers is undoubtedly on the rise. On the eVestment database alone, screens are up more than 500% since 2012.

“It’s a system everyone should be using. It’s a walking RFP,” said Chris Kamykowski, Senior Vice President at Summit Strategies Group during a recent FundFire Consultant Roundtable.1 “Managers are starting to understand that shadow searches are happening more often than in the past. There are going to be situations where you’re a winner or in a finals without even knowing you were in a search.”

The sheer amount of information available to investors and consultants through databases has skyrocketed in recent years. To put this vast amount of data into context, in 2015, eVestment had more than 1.3 million reviews of 60 million data points across over 50,000 products and 2,500 product characteristics. “The buyer can be in the driver’s seat,” said Janie Kass, Managing Director at consulting firm Margolis/Kass Advisors in a recent FundFire article.2 “As long as the buyer has knowledge, they really don’t need as many people responding to an RFP. It’s just creating extra work.”

In this paper, we will walk through an example from the eVestment platform of how a shadow search is conducted. We’ll also discuss some of the trends we’re seeing in screening activity, and how managers can use this information to position themselves for success.

Introduction

Managers are starting to understand that shadow searches are happening more often than in the past. “ ”Chris KamykowskiSenior Vice President, Summit Strategies Group

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According to a recent Cerulli report, the vast majority (81%) of consultants polled have an approved list from which they select managers. Others start each manager search from a broad universe and screen on client-specific parameters.3 Most established consultants have dedicated resources to deploy toward each part of the consulting process and manager research teams can consist of up to hundreds of analysts. At most firms, client-facing consultants work almost exclusively from recommended lists defined by this manager research group. Any individual consultant handles dozens of new or replacement mandate searches per year. Crucial searches take place every quarter in every asset class as consultants refresh and review their recommended lists.

Because we track the activity of investors and consultants on the eVestment platform, we are able to see in aggregate how this process plays out in real-life. We also reached out to research analysts from a variety of our consultant client firms to get a better understanding of how they are using databases to narrow down managers.

What is a universe?

A universe is a set of products that are grouped together by asset class and investment style. Universes can be further refined by characteristics, allocations, preferred benchmark, narratives and performance.

How Consultants Are Using Databases

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Consultants who are looking to evaluate a manager would start with a broad group. In the example below, an analyst looking for a Large Cap Growth strategy would begin by running a screen on all US Equity managers. The goal would be to initially narrow down the list of over 3,000 to a workable number (in this case, 86). The filters that we selected are among the most common run by our consultant and investor clients. Research analysts we interviewed also mentioned they frequently filter on factors such as inception date, fee information and preferred benchmark.

Example of a Shadow Search on eVestment

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From the narrowed down list of asset managers, the analyst would then research many more statistics allowing them to rank managers. Common statistics we have seen and that the research analysts we interviewed use include: Upside/Downside Capture, 1-year, 3-year, and 5-year performance statistics, information ratio, current number of holdings, active share and AUM.

Further Analysis

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At this point in the process, the sales and marketing efforts of investment managers can play a very large role. What is the perception of your firm? What do investors and consultants think when they see your firm’s name on their screen? Have you had success in another area, but are not known for this type of product? Has your performance lagged recently, but you have a reputation that your product will protect in down-markets? These types of subjective criteria can certainly be a factor in marketing success.

Asset Class

Universe

Firm AUM

Product AUM

Firm Ownership

Vehicle Availability

Derivatives & ESG

Product Personnel

Narratives

Philosophy

Process

Performance

Relative to Peers

Risk

Consistency

Increasingly Common Screening Sequence

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Managers may be surprised to learn that while performance is always an important factor in manager selection, it is not the top criteria for initial screens. In fact, performance screens are down by half since 2013. In 2015, only 15% of initial screens were for performance and 5.61% of screens were for AUM information. This means that 79.4% of screens were for other data points.

For instance, ESG is a data point increasing in popularity, as seen in the list at left. Request of ESG information continues to grow with databases adding or expanding requests for this information. From January 2014 to September 2015, screens for ESG related fields increased 312% on the eVestment database. Mercer also asks several ESG-related questions on its questionnaire. Cambridge Associates was the most recent consultant to add ESG-related fields to its questionnaire in Q4 2015.

Several consultants issue custom questionnaires in addition to the data available in databases like eVestment and expect these forms to be filled out regularly. Much of this process is quantitative in nature as statistics are calculated on a rolling basis, risk and return is assessed, and changes in assets are studied. However, the consultants we work with pay close attention to qualitative measures as well. Has there been Portfolio Manager/Analyst turnover? Is a firm GIPS compliant/audited?

“The screening process is becoming much more robust,” said Jonathan Doolan, Director at Casey Quirk in a recent FundFire article.4 He said investors and consultants are looking at “the quality of the team, the depth of the team, the pedigree of the team.” Many databases require detailed staff breakdowns, including total, gained and lost investment and non-investment professionals as well as key departures.

Investors are also wanting more detailed AUM breakouts. As a result, Mercer and CAMRADATA have added year-end asset breakdowns and eVestment has expanded the global asset breakdown by geographic region to include individual countries within the Europe ex-UK universe.

Trends in Screening ActivityTop Data Points

Screened in 2015

1. Product AUM2. Product Managed with ESG Bias3. Total % Minority Owned4. Current Dividend Yield5. Minimum Account Size6. Current # of Holdings7. Preferred Benchmark8. Firm AUM9. Fossil Fuel Free10. Average Quality Issue11. Active Share12. EMD: Govt / Sovereigns13. Modified Duration14. Annual Turnover15. % Employee Owned16. Current Cash17. Total Institutional AUM18. 5 Yr. Performance Return

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It is important to note that of the products that were screened out in our example, many were actually excluded because they failed to provide data. In fact, over 600 strategies were ruled out because they failed to provide current number of holdings. Managers that are not keeping their data up-to-date risk dropping out of shadow searches for which they may very well qualify.

When a manager fails to include certain data or provides inaccurate data, it usually means immediate elimination from the pool of managers being considered for a mandate, Kamykowski said.1

Addressing the Challenge

Data PointTotal

ScreensMissed Screens

Percent Missed

Total AUM 1,095,346 111,836 10.2%Total % Minority Owned 88,261 41,065 46.5%Current # of Holdings 77,243 18,815 24.4%Total Institutional AUM 43,214 8,125 18.8%Is product currently managed with a ESG investment bias? 35,470 18,805 53.0%

Effective Duration (Yrs) 33,000 7,731 23.4%Secondary Equity Style Emphasis 32,193 15,733 48.9%% Employee Owned 28,621 4,083 14.3%Average Quality Issue 28,255 6,982 24.7%% Female Owned 22,842 11,557 50.6%

These metrics were most screened on eVestment in Q4 2015, and had a high % of products fail due to missing data.

Q4 2015 Missed Screens

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It’s valuable to update databases as soon as possible after quarter-end to ensure maximum inclusion in screens. Using the eVestment database as an example, firms who provide data 45 days after quarter-end miss out on 18% of the searches that have already happened during a quarter on average, as seen in the table below. We believe this trend would hold true across other databases as well.

2015 % Missed Screens # of Products ScreenedBy the 30th Day 4.9% 143,159By the 45th Day 18.0% 529,429By the 60th Day 44.2% 1,340,025By the 75th Day 63.0% 1,906,038

Some investment managers claim the way to win a mandate from any consultant is simply to be the best performing of all of the finalist candidates. The best performers may indeed win most of the time, but from our interactions with consultants, a finals presentation is about much more than who has the best trailing returns.

Portfolio concentration is a popular topic and in general, consultants seem to be searching for more concentrated equity managers. It is very easy for a manager to highlight active share or the current number of holdings data points in comparison with peers. But why not go deeper to really set yourself apart? Show how your team has been consistent over time with portfolio construction. How have your number of holdings changed? How have your highest conviction ideas performed relative to the rest of your holdings?

Screening activity has been proven to be indicative of asset flows.

Products in the top 20% of most consultant reviews average flows +/- $785 million while those in the bottom 20% average institutional flows of +/- $59 million the following quarter. Products that land in the top 20% of their peer group in data population average quarterly flows $12.43 MM higher than those in the bottom 20%.

Actions Managers Can Take

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Setting Yourself ApartWe created two example pitches below. Judge for yourself which would leave a more lasting impression with a consultant.

Example 1We are a high conviction equity manager. We believe our investment process is able to identify securities which are likely to outperform the Russell 1000 Growth Index. The statistics below highlight this commitment towards truly active portfolio management.

Active Share: 95.2# of Holdings (as of 12/31/15): 37

Example 2For over a decade, we have successfully executed a high conviction investment process. We believe our investment process is able to identify securities which are likely to outperform the Russell 1000 Growth Index. The chart below reflects our commitment towards active management, and also validates that we have found this method to be rewarding to our investors. In 2015, six of our 10 largest holdings were also top contributors to the portfolio, as you can see in the table below.

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Shadow searches continue to grow in popularity, especially as more managers understand the importance of keeping their data fresh and accurate in consultant and third-party databases. Savvy asset managers who recognize the importance of being included in these initial screens stand a much higher chance of being invited to participate in a finals presentation for a mandate allocation. But even if you get through the initial screens, there still remains work to be done. What will the consultant remember about your strategy? What do you do better than anyone else? Answering these questions will put you in the best position for success.

Interested in finding out what actions you can take to pass more screens and increase your visibility to investors and consultants? Learn about eVestment’s database population services for asset managers or request a demo today.

Conclusion

About eVestmenteVestment provides a flexible suite of easy-to-use, cloud-based solutions to help the institutional investing community identify and capitalize on global investment trends, better select and monitor investment managers and more successfully enable asset managers to market their funds worldwide. With the largest, most comprehensive global database of traditional and alternative strategies, delivered through leading-edge technology and backed by fantastic client service, eVestment helps its clients be more strategic, efficient and informed.

Sources1. Consultant Roundtable Exchange: 2016 Outlook. FundFire. (2015, Dec. 8)2. Pichardo-Allison, Raquel. “Shadow Searches Unlikely to Kill the RFP.” FundFire. (2014 Sept. 2)3. Manager Research: Seeking More Than a Performance Track Record. Cerulli Investment Consultants Report 2015, Page 364. Lemann, Mariana. “Skyrocketing Database Usage Highlights Shifting Approach to Searches.” FundFire. (2016, Feb 26)