“I don’t have to like you, we don’t have to be friends,” says Chris Ailman, chief investment officer of CalSTRS, about the external fund managers that the $188 billion investor fund hires.
CalSTRS, like many large funds, is on the path to insource more and more investment management functions.
“We have the ability to manage money internally at one tenth of the cost and with more control, so we are constantly looking at it. We’ve looked at our global peers with more than $200 billion, and they have 58 per cent of assets internally.”
Ailman’s comments were part of a panel discussion at the Fiduciary Investors Symposium that looked at the progression, and maturation, of an investor’s relationship with its investment managers.
Ailman says he prefers a bit of tension in the relationship with external service providers, as “my staff find it easier to pull the trigger”.
The panel – which included Tim Corbett, chief investment officer of $120 billion MassMutual; Tom Osborne, executive director of IFM Investors; and was chaired by Brian Clarke, also executive director at IFM Investors – discussed fees, culture and transparency between limited partners and general partners.
The investors on the panel, Ailman and Corbett, both agreed that “you get what you pay for”, and while they are willing to pay for alpha, they will not pay for beta.
“I’ll pay for alpha – not 50 per cent of the alpha, but I’ll pay as much as 20 per cent of alpha. But I don’t want to pay for beta, especially when we can replicate it in-house,” Ailman says.
Performance fee structures were favoured but also found to be challenging, as they seem to favour the upside and not fully account for the downside.
Performance fees can also be an indicator that there is a cultural misalignment, with the investors very wary of managers that were interested in assets under management.
It was unanimously agreed that large investors need to look under the hood of a manager they will appoint, to understand what’s driving the motivation and relationship.
“You can’t get the culture of a firm from the marketing person. I say to my staff, ‘You need to go to the manager’s office and hang out with them over many years’. It is hard to measure the culture; most of us are analysts and culture is behavioural,” Ailman says.
“Picking a manager is similar to picking an investment. If all you see is the chief executive and the marketing people making a presentation then you are not getting the full picture. I have a bad habit of dropping in on a manager unannounced and saying I want to sit out on the floor and work. Eventually people start relaxing and being themselves, and it is very eye opening.”
Ailman is a supporter of increased transparency, and the work by the Institutional Limited Partners Association, among others.
“Every time there’s been increased transparency it’s been a better deal for LPs; we have reputation risk too,” he says. “We will push for it in real estate and infrastructure as well as private equity. It’s our capital to begin with.”
Ailman is an advocate for better alignment that will benefit all investors, not just large investors who are doing their own deals.
Osborne believes the best relationships between managers and investors are where the investor expectations are clearly set out; the investor is fully briefed on the strategy, culture and incentives of the manager; and the manager is appropriately resourced to deliver consistent with expected outcomes.
However, too often the investor is under-resourced and relies on the manager.
“It comes down to alignment, transparency and culture. The investor has to have confidence in the people at the manager,” he said.