A manager of managers’ fund aims to achieve its objectives by selecting differentiated managers and giving them a mandate to make investment decisions on behalf of the fund. The rationale is diversification and balance can be better achieved by allocating assets to more than one manager, each with a distinct style. The manager of managers role is to select the managers, monitor performance and risk, and alter the composition of the fund to adapt to market conditions.
Scott Brooks, head of defined contribution at SEI, explains the concept using the example of small/mid-cap (SMID) funds. With the traditional approach, a plan sponsor may offer participants a SMID Value fund, a SMID Core fund and a SMID Growth fund to cover the risk/return spectrum. With SEI’s U.S. Small/Mid Cap Strategy manager of managers fund, participants can select the one fund and get access to 10 underlying sub-funds—which include some that DC plan sponsors would typically never offer to participants, such as an opportunistic value fund or a real estate investment trust (REIT). “The participants only see one SMID fund [on their DC plan investment menu]; it makes participants’ lives easier,” Brooks notes.
Research from SEI shows DC plan sponsors tend to offer far more investment fund options than the number actually used by the average participant. While it’s important to offer participants the opportunity to diversify retirement assets, an overly complicated fund lineup can make it challenging for even well-informed investors to choose appropriately. SEI found the disparity between offerings and participant demand is driving sponsors to consolidate the number of funds offered in the core lineup.
SEI has been serving defined benefit pension plans since the 1980’s and started its manager of managers business in the 90s. Brooks tells PLANSPONSOR, this approach lets smaller firms get access to the same number and caliber of investment managers that large firms are able to access. He explains that different asset managers have separate minimum asset requirements for investment accounts—say, $25 million to $50 million—so, it would take around $1.5 billion in assets to get access to around 40 fund managers to achieve diversification. However, with SEI, firms with small retirement plans can get access to those same managers since their assets are pooled with those of other investors.
“Since SEI is large scale institutional investor, kind of like CalPERS, we can place sizeable assets with managers,” Brooks says. “Which also allows us to negotiate competitive fees.”
SEI recognized this advantage would also be a benefit to DC plans. It serves as a 3(38) investment manager for DC plans, which Brooks says is the same concept as an outsourced chief investment officer (OCIO) for pensions, “but DC's don’t embrace that terminology.”
According to Brooks, there are three primary capabilities SEI can offer, including co-fiduciary oversight of the entire investment menu; target-date fund offerings, including custom; and collective trusts providing manager of managers investment options. Big benefits for DC plans, he says, include the potential for lower costs, as well as broad access to best in class asset managers. The manager of managers approach offers a similar level of alpha, but lower risk, for DC plan investments—DC is becoming more institutionalized, Brooks adds.
He stresses that what DC plans get with a manager of mangers approach is an added layer of protection at no additional cost compared to what they are currently offering participants. For example, he says, SEI’s large cap strategy’s cost of 50 basis points (bps), is very competitive compared to a single manager’s 55 bps to 60 bps cost, and the plan sponsor is also getting co-fiduciary protection and better response to the market.
Brooks notes that at SEI, there are 100 people in the investment management unit whose job is to talk to managers every day and change investment portfolios according to what is changing with those managers. Without this oversight, it takes time for plan sponsors to make changes on their own. An investment committee that meets only once a quarter may not discover a problem until it’s adversely affected the fund for a while, but SEI can quickly swap out funds because staff has been talking to other similar mangers, he says.
“The process [of changing investment funds] can be reduced from 270 days, to conceivably as little as one day,” he adds. “If we found a Bernie Madoff, we could fire him the next day, whereas a committee may not have found it as soon and it would take longer to change.”
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