GSAM: When considering a potential sub-advisory partner what are the organisational attributes that Skandia Investment Management looks for?
Alan Durrant: First of all we consider the organisation’s structure. Obviously a potential partner needs to be resourced and managed in such a way that both portfolio and management teams can work effectively without undue constraints or distractions.
Areas we pay particular attention to include the company’s ownership and whether or not this is likely to be affected through restructuring or consolidation. We also consider the issue of staff ownership, whether or not the company is independently owned or part of a large parent group and how local teams fit and work within the overall group structure. We also consider an organisation’s business viability – whether the business looks stable, how they are invested for future growth, where they sit in regards to their competition, how they differentiate themselves in terms of product … And then the obvious elements such as profitability, cash flow generation and gearing levels.
GSAM: What do you look for in the portfolio teams – in terms of their status within the organisation?
Alan Durrant: Generally, we look to get confirmation that the team in question has sufficient market clout to access the company management and receive quality service on the sell side. We also consider historical changes which have taken place in the team (personnel as well as process-related). It’s important to find out what the split of time is between portfolio management and other activities or secondary roles they may have. Also, we want to know how their approach would change if the assets under management were to shrink or grow significantly.
GSAM: How do you gauge an organisation’s commitment to the product or team in question – is this an important part of your selection process?
Alan Durrant: Absolutely. We look not only at the product but also the team in question and their overall contribution to the profitability of the business.
In doing so we consider the product’s assets under management, its percentage relative to the group’s assets under management, the percentage of these assets in dedicated mandates versus balanced mandates and the ‘stickiness’ of these assets – whether they are institutional or retail and if there is particular dependence on major clients. As important is the number as well as the quality of the team members, as well as the systems they have at their disposal.
GSAM: In addition to the above, do you consider business culture to be an important factor?
Alan Durrant: Yes. We seek out partners who have adopted a culture which stimulates and motivates its management teams to deliver the best results. We question things like opportunities for fund managers to develop and progress internally rather than externally; whether or not the company actively encourages creativity, flexibility and contrarian thinking, as well as financial incentives. We also need to know how the organisation deals with individuals who aren’t delivering.
GSAM: You touched on financial incentives, what questions do you ask in relation to remuneration packages?
Alan Durrant: We like to know about the remuneration structure of key individuals within the team and organisation, the nature of their bonuses, for example whether or not these are performance-related, if the bonuses are linked into the growth of the business at all. Also, the level of equity ownership by employees is a consideration and what – if any – the lock in periods are and how these are structured.
GSAM: What about criteria specific to Skandia? What are the factors which you look for in ascertaining how committed a potential partner would be to you?
Alan Durrant: Well, we find out how important a client Skandia will be to them and how effectively our mandate will be managed and serviced. Consequently, we ask about the size of our mandate relative to others, the quality and of course the stability of the team assigned to our account, how accessible their management team is, what level of preparation they do for their client meetings, what they provide in the way of reporting, and of course what they offer in terms of sales and marketing support.
GSAM: In terms of investment philosophy and process – what would you say were the key attributes you seek out in a sub-advisory partner?
Alan Durrant: At Skandia we look for a number of criteria to be in place – of which philosophy and process are clearly a major part. In terms of philosophy, we look for one which provides the framework for value generation. Then we are looking for a process that enables the philosophy to be consistently implemented over time.
People are a third consideration. A skillful and insightful fund management team is very much part of the equation, as is our understanding of the managers’ approach to performance – for example, are they achieving results through luck or skill?
And finally, as I mentioned before, the objective regarding performance is to judge whether performance is a result of skill rather than luck. In doing so, we look at criteria such as patterns of performance, for example – is the manager more successful in a bull or a bear market? What is the concentration of the fund and the bet sizes? We also look at whether or not the top/bottom holdings are consistently adding value and if key bets are being backed with sufficient conviction.
Researched and published in association with Goldman Sachs Asset Management.
