Part of an interview series with Zurich Insurance Group, The Pensions Trust, California State Teachers’ Retirement System (CalSTRS) and Environment Agency Pension Fund on selecting, appointing and monitoring managers
Please describe your selection process.
We outsource our day-to-day investment decision-making to external fund managers, so selecting and appointing the right fund managers is fundamental to the success of our investment strategy.
Our process starts by screening Mercer’s manager research database to create a long-list of suitable managers that potentially meet our search criteria. Then we spend time reviewing all of the available research on the manager to whittle down the long-list to a short-list of four or five preferred managers.
The next stage involves getting to know the short-list of managers better. We typically do this by spending half a day meeting with them at their offices, during which we will familiarise ourselves with their investment philosophy, investment process, business model and people. We also try to get a feel for the culture of the team and the organisation more generally.
Once all of the meetings with the short-listed managers have been completed, the investment team meets to discuss the merits of those managers. We may decide to have a second round of meetings with one or two of the candidates before we invite our preferred manager to meet with our investment committee. From a governance perspective, the investment committee is responsible for final approval, at least for all of our alternative asset classes.
What information do you source during the selection process?
Ultimately, if it is an active manager, we are looking for a set of attributes that gives us conviction that the manager has sufficient skill to outperform a benchmark index or performance target. We have an internal document setting out the key attributes that we look for in a manager, including things such as the business model, appropriate remuneration structures, long-term mind set, low portfolio turnover, strong risk management, decision-making processes that embed ESG, to name a few.
How do you asses the ESG integration practices of potential portfolio managers?
The review of a manager’s integration of ESG is now reasonably well-integrated into the selection process, although we would tailor our expectations depending on the asset class and style of the investment manager.
We have developed a specific set of criteria in terms of ESG: we want to know more about their over-arching philosophy on responsible investment/ESG, and how well it is aligned with our own investment beliefs and policy. We like to see evidence of CEO- or CIO-level commitment, and that the manager is advancing responsible investment practices within its peer group. Following this, we normally spend more time trying to understanding how these over-arching corporate policies translate to the strategy that we are interested in allocating to. We certainly think that portfolio managers should be able to talk about ESG integration at both the portfolio construction level and at the regional and/or sectoral level before drilling down into one or two securities, explaining how ESG factors have been taken into account in the valuation and the investment decision.
Sometimes we find it is helpful to pick a couple of the relevant topics and try to discuss these in more detail. One of the main topics we have focussed on in the last year or so is climate change. We have had a number of discussions with our active equity managers on their long-term view on the energy transition and how this is reflected in the portfolio.
What do you look for when you are assessing potential portfolio managers’ ESG integration practices?
The answer to this question really depends on how experienced and knowledgeable the manager is about responsible investment. In the best cases we select a manager that has a long-term investment philosophy on responsible investment aligned with our investment policy, and who is able to demonstrate how ESG factors are integrated in their research and investment decisions.
But we are also willing to work with managers that are new to ESG, as long as they are committed to being aligned with our philosophy on responsible investment. If they are at the start of their journey, buying in some ESG data alongside internal training for analysts is a good step in the right direction.
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A practical guide to ESG integration for equity investing