In the third and final part of a series on choosing asset managers. Jonathan Stapleton speaks to Richard Butcher and Roger Mattingly about beauty parades.
Editor, Professional Pensions
Managing director, PTL
Managing director, PAN Trustees
Jonathan is editor-in-chief of Professional Pensions. He joined PP in July 2001, launched PP Online in 2006, became editor in 2009, launched Workplace Savings & Benefits in 2012 and became editor-in-chief of both brands in 2014.
Richard Butcher has been involved in scheme governance since 1985 and joined PTL in 2008, becoming managing director in 2010. He is a fellow of the Pensions Management Institute and is on the organisation’s council. In 2017 he was appointed chairman of the Pensions and Lifetime Savings Association (PLSA).
Roger Mattingly is both managing director of PAN Trustees and a principal of PAN Governance. He has previously served as a main board director of two leading pension consultancies in a career that has spanned more than 30 years He is also a past president of the Society of Pension Professionals.
Jonathan Stapleton: How many asset managers would you expect to be in a beauty parade?
Richard Butcher: I would caveat this at the beginning with a health warning, which is that I’m not a great fan of beauty parades. I don’t think beauty parades really add a lot to the process. By the time you get to beauty parades you are invariably selecting on subjective factors, so you might want to select them because of the colour of their eyes or ask them some probing questions that frankly, you should already know the answers to. So I’m not a great fan of beauty parades.
How many? Well at least one if you are going to have a beauty parade. Probably no more than three, because once you get beyond three you start to get frazzled and you can’t remember who said what, and who impressed you in relation to what. It just takes too much time and I’m not sure that seeing more than three adds any value, providing you’ve gone through the proper process beforehand of identifying what it is that you are trying to achieve, the health questions, the due diligence type of stuff and so on. So not more than three.
I’ve been involved in a beauty parade where there was only one candidate and we decided to parade that one candidate because we wanted to keep them under competitive pressure while we negotiated with them on terms.
Jonathan Stapleton: How long do you have presentations generally? Do you tend to have a preferred length for these sorts of presentations?
Richard Butcher: Yes – between half an hour to an hour. In fact, rarely an hour probably 50 minutes or so. This is because by the time you arrive at the beauty parade you’ve done most of the hard work of selecting your fund managers – those that you should see should all be capable of solving the problem that you need solving. So, you are at that point really just selecting on arbitrary factors. If you give them two or three hours, they will take two or three hours. They are there to sell their services to you, so they will take two or three hours. If you give them half an hour, it doesn’t give you enough time to ask penetrating questions. Between half an hour to an hour is optimum.
Jonathan Stapleton: Roger, do you agree?
Roger Mattingly: I would invariably have a short list of three, purely because of the psychology of anything less than three. One is an unusual number in terms of a shortlist but obviously it has happened. Two does concern me because one could end up winning it by default because the other one does not perform on the day. Whereas obviously you mitigate that risk with three.
In terms of timing, maximum an hour. I would almost without exception encourage questions throughout. Often, when you invite the candidates you would say 40 minutes for presentation maximum with 15 minutes for questions. But actually, I think there is more to be gleaned in terms of actually getting a proper understanding of what’s being presented by challenging and questioning throughout the presentation. Not to the detriment of the presenter. Because what you don’t want to do is actually stall them a third of the way through their presentation and have them not finish it, because that doesn’t serve any great purpose.
Jonathan Stapleton: What is it you both look for when it comes to candidates at this stage?
Richard Butcher: In the context of fund managers, it’s different for different type of roles. I’m less concerned about building relationships and having fund managers that I feel I can get on with personally because, frankly, they just don’t come to very many of our meetings.
What do I look for? Just on the basis that by the time they make it to the shortlist, they tick all the boxes, I’m now really just looking at subjective factors and taking the opportunity to test the answers they’ve already given me.
So if they’ve reassured me that they have a robust process for delivering my return characteristics I’ll want to test and understand how robust those processes are. It’s just an opportunity to get under the skin of the bland and written request for proposals (RFP) document and explore that in more detail. There may be questions that perhaps haven’t been answered in the written part of the process – and you might want to explore these in the beauty parade as well – but it’s really just getting under the skin of the answers given in the RFP and exploring any areas that you feel haven’t been addressed in it.
Jonathan Stapleton: Roger, you said you try make it an interactive process – are there any other specific things you’re trying to get out of them?
Roger Mattingly: Echoing Richard’s point, I think that in the response prior to the beauty parade presentations the candidates would have made sweeping statements about their attribute and capabilities. They will say they’re the best fund manager that’s ever existed and so on. And what you’re looking for is evidence to support that.
I actually make it my mind-set prior to the presentations that I am not going to accept anything at face value and I want to have the evidence that supports those sweeping statements. If they’re not able to provide evidence then that’s a serious marker against their proposal and their presentation.
In terms of the psychology of the actual participants, in my view what you’re looking for is that the people who are in front of you are appropriate for that particular remit. What I don’t want to see is people who are cosmetic, or not actually going to be the people who will be delivering the mandate – that always creates a bit of tension because the fund manager should probably be focussed on managing funds rather than attending beauty parades, but it’s very difficult to make a decision based on a proxy, which is effectively what it is if you don’t have the key people in front of you.
Jonathan Stapleton: Richard, do you have a tip or two for asset managers – how do they get the best out of trustees? How they can get the worst?
Richard Butcher: Turn up on time, first of all. Secondly, stick to time. In the beauty parade I would look for them to perform in the same way that I look for them to perform when they send me their RFP – I want it to be brief, to the point and to answer all my questions.
I don’t want them to take it as an opportunity to show boat or show off because that adds nothing to the mix at all. I also don’t want them to go through a 32 page slide deck, I want them to bring out the key things and key messages – they can leave us with a 32 page slide deck, I probably won’t read it, but they can leave it with me.
What I want them to address is how they will deliver the return characteristics that I want. However, what a lot of fund managers will do – and this is a common mistake in beauty parades – is spend half an hour telling you what their view of the world is, which is completely subjective. So, interest rates will go up in 18 months’ time? They may or may not be right and I don’t care. We don’t know whether they’ll be right or wrong until 18 months from now. What I’d rather know is what sort of analytical process they have got that will arrive at a conclusion about whether interest rates will go up or down, and what sort of structures they built into their fund that accommodate the possibility that investment rates will go up or down.
Roger Mattingly: Yes, the ones that are not successful are the ones that have a monologue of what they want to say without listening to the interaction. They have made up their minds and the adrenaline kicks in and they don’t realise that they aren’t pausing for breath, that they need to create those gaps and interact with the trustees. Those that do are more likely to be successful so it is absolutely crucial they send the right people along. Also, it is absolutely crucial that they don’t send the cast of thousands – it becomes very clumsy if they send any more than three. For example, if you’ve got four people attending but one person speaking, you end up with three people just sitting there and it becomes awkward and stilted and it is not a recipe for success.
Richard Butcher: They have to be there for a purpose. I remember one time observing a beauty parade on behalf of another client, where this chap turned up and sat on the side and said nothing throughout the entire presentation. He said hello when he arrived and goodbye when he left, and that was it. They have to be there for a purpose, to say something.
Roger Mattingly: You’re often only as good as your weakest link. So if you send too many people along it causes frustration and you run the risk of one person letting the side down. It is that person that will be remembered. It doesn’t matter how brilliant the other three or four are, it’s the one person who isn’t up to scratch that day who is remembered perversely and it is that one who then dilutes their chances of success.
At a Glance
- Trustees tend to keep beauty parades succinct with a shortlist of around three candidates
- Candidates should look to evidence the information already provided to schemes
- Managers should avoid ‘showboating’ in the presentation
- ‘How trustees conduct beauty parade’? Watch it Here