Chief investment officer of the $60 billion Mass PRIM, Michael Trotsky, believes the CFA Code of Conduct helps institutional investors assess managers and is an important step in restoring trust in financial services. Integrity will form part of the due diligence process as the fund looks for private equity co-investment partners for the first time.
The $60 billion Massachusetts Pension Reserves Investment Management Board has nearly 300 investment manager relationships, and chief investment officer, Michael Trotsky, holds those managers to account, quizzing them on values and ethics as part of the due diligence process.
He is the chair of the CFA Institute asset manager code advisory committee, and takes his role in progressing integrity in the industry seriously.
“There is a crisis of confidence in money management and banking,” he says. “Trust is an acute problem in the industry. This code is an attempt to address it in some sense.”
Mass PRIM includes a question in its RFPs asking manager whether they adhere to the code, and if not why not.
“There are about 1000 firms globally which claim compliance, so we can’t use it as an absolute litmus test yet. But the dialogue of why not is interesting and in all cases if they are not already compliant then they do.”
Trotsky says the code of conduct sits alongside the more quantitative GIPS reporting standards that are used almost universally now by managers.
“The GIPS standards make sure managers are accurate and transparent about reporting performance which helps in due diligence of managers on the quant side,” he says. “Every due diligence process includes qualitative and quantitative qualities, looking at behaviours, processes and values. Values are an important part of manager evaluation. The way I view the code of conduct is it helps institutions evaluate the qualitative side of a manager’s firm, it fits hand in glove with quantitative factors.”
The code is also an indication that the upper management, where the values come from, are putting an emphasis on values ethical behaviour, and while it is not a guarantee of ethical behaviour, Trotsky believes it is a starting point.
“The principles are so basic that anyone who has a problem or objection is a serious red flag,” he says. “In practice, the reason for not complying is they either don’t know about it but when they read it are happy to sign on, or they know about it but they have their own code of conduct which his usually more detailed.” This is true particularly of the larger managers.
It is not just at the RFP point of contact that the fund quizzes a manager’s integrity. Mass PRIM makes multiple visits a year to its managers and asks if any employees have violated the CFA code, their own code, or the law.
“It ensures upper level management are engaged.”
The investments of Mass PRIM are 100 per cent outsourced to external managers, and consistent with its integrity focus, transparency plays a key role.
On the public market side it has complete transparency through its custodian, BNY Mellon.
And in the asset classes that are not as transparent, such as transparent, it is pushing for more, such as hedge funds.
An example of this is an RFP it just issued for managed accounts in hedge funds, with transparency one of the driving factors of the structure.
“Managed accounts give us more rigorous and frequent transparency. Most funds are willing to give positions but usually on a lag, I understand the reasoning and it is a balancing act,” he says. “In an ideal world there would be full transparency and managers don’t have to worry about giving away their positions. There needs to be trust both ways.”
Over a year ago launched project SAVE – strategic analysis value enhancement – introducing six initiatives to save or add value, worth an estimated savings of $100 million annually.
One of those initiatives was moving from a hedge fund of funds to direct hedge funds, which saved $40 million in fees.
But not only was it a cost saving initiative, it changed the nature of the relationships – reducing the underlying funds from 237 in the fund of funds structure to 22 in direct funds – and thus transparency.
The fund has a successful private equity program, recognised recently by Buyout Magazine and the Private Equity Council as the best in the country, and for the first time in PRIM’s history it was approved this week to do co-investments.
This will also introduce huge fee savings, with every $100 million deployed about $26 million will be saved over the life of the investment.
The private equity allocation is 10 per cent of assets. The co-investment program will look to invest alongside talented GPs in the US and developed markets.
The SAVE project has also seen the implementation of a cash overlay, worth about $25 million a year in added value.
This year Mass PRIM will be analysing whether it is appropriate to engage in some internal investment management.
Mass PRIM fund core asset allocation
Global equity 43 per cent
Core fixed income 13 per cent
Value-added fixed income 10 per cent
Private equity 10 per cent
Real estate 10 per cent
Timber/natural resources 4 per cent
Hedge funds 10 per cent
CFA Asset Manager Code of Conduct:
1. Act in a professional and ethical manner at all times.
2. Act for the benefit of clients.
3. Act with independence and objectivity.
4. Act with skill, competence, and diligence.
5. Communicate with clients in a timely and accurate manner.
6. Uphold the applicable rules governing capital markets.