After institutional investors of all types and sizes posted strong 2017 fiscal year returns on the back of the bull equity market, moving forward asset owners will have to get creative if they want to reach their 6-8% annual targets. Allocating toward the international market as well as careful manager selection will be among the keys to success, consultants Travis Pruit and Jeffrey Snyder told a group of industry practitioners at a breakfast briefing hosted by Fundmap (formerly iiSearches), MMR’s sister institutional mandate database, at the Lamb’s Club in Manhattan, New York, on November 14.
“From an institutional perspective you have to be non-U.S.,” said Pruit, a senior consultant and U.S. proposition leader at Mercer. “Non-U.S. markets are well behind the U.S. in terms of recovery, earnings growth and valuations.”
The duo also advocated for continued exposure to private equity despite high prices and a crowded market. Pruit, who mainly works with foundation and endowment clients, suggested venture capital is “still a great place to look,” as well as private debt. Even defined contribution plans are trying to figure out ways to implement alternatives into their plans to overcome the low-return environment.
“The thing you have to remember with defined contribution and illiquid investments is that there’s a lot of back office things that have to happen,” said Snyder, VP and senior consultant at Cammack Retirement Group. “There’s $23tn in U.S. retirement assets, $8tn of which in defined contribution (DC) as of last count, and more and more is heading there … there is certainly an appetite and desire to move into that space.”
The uptick will not come only due to the asset class’s attractiveness but also the consolidation of defined benefit and defined contribution staffs at state treasuries. The DC expert Snyder, credited the confluence of ideas and desire to leverage advantages from one plan type to the other.
The two consultants differed in manager recruitment styles, as Snyder’s firm issues requests for proposals while Pruit’s does not. Pruit credited Mercer’s immense research staff for the consultant’s lack of reliance on RFPs, and added that reaching out directly to its 140 global researchers with fresh ideas is the best way for asset managers to get their pitches through.
“We are interested in learning about things that are unique, we are going to have less time for traditional well diversified equity strategies,” said Pruit. “The more we can figure out what the edge is in terms of the strategy, the more we can figure out how it might fit in the overall portfolio, and is something that’s not just delivering a little more expensive beta.”
The duo both said they look beyond performance when making manager selections. Snyder emphasized it’s a “people business” and recommended portfolio teams do most of the talking at finalist presentations to give plan sponsors a better idea of how they will work together effectively. Pruit said he doesn’t want his clients to be late on the curve, and would rather pick a manger with poor numbers that has a track record and outlines how it will help investors succeed.
Still, behind relationships and anecdotal evidence, data fuels plan sponsors’ decision making.
“I think with services like Fundmap, data is incredibly important,” said Snyder. “It allows us to tactically send out communication and education materials to help educate and drive results. Likewise, our investment research team needs data points in order to help drive investment decisions and recommendations.”