PLANSPONSOR - October/November 2019 - 30

When working with a new client, Pensionmark educates
the committee upfront on investment-monitoring necessities,
says Rick Wedge, managing director for the firm's San Francisco
team. " Ultimately, the committee members need to understand
the process and the criteria for monitoring the investments but
not necessarily all the details that go into the reporting, " he says.
" It's all about having a process and documenting that you're
following that process. "
At Pensionmark, investment review entails evaluating 12
categories of information on each investment, and it grades and
weights each fund for each category.
The advisory firm also benchmarks
each fund in each of those 12 categories,
according to the fund's index and
peer groups. " Our scoring system is
on a 100-point scale, which is easier
for committees to understand, " Wedge
says. " We all know that if you score 100
out of 100, you're doing really well. If
you score 70 out of 100, not so well.
" Our clients include our scoring
process in their investment policy
statements, " he continues. " We believe
this is a best practice. The IPS should
outline how funds will be reviewed. "
When Alliant Retirement
" You need to focus more on three-, five- and 10-year performance.
Committees can get focused on a myopic, near-term
view. If we're telling participants they should not focus on the
near term, I think we should not do that, either. "
Probably the most challenging part of investment moniSECTIONS
OF THE IPS
* Executive summary
* Investment options list
* Purpose
* Statement of objectives
* Duties and responsibilities -
Investment committee, custodian,
investment adviser, fiduciary adviser
* Asset class guidelines
* Implementation - Expenses,
performance, risk, operations
Consulting advisers talk in committee
meetings using investment analysis
terms such as alpha or Sharpe ratio, for
example, some committee members
will not have the investment experience
and background to understand those,
Laschinger says. Alliant developed an
investment-scoring system that clearly
shows the committee members how
each fund is doing, he says. " They may
not be entirely clear how exactly the calculation works for alpha,
for example, but they do know that an 'A' score is good and that
an 'F' score is a problem that should be addressed immediately. "
MAKING THE CALL
When is the time right for committees to make a fund change?
Do not be driven by short-term performance results in making
that decision, Wetzel cautions. " Every manager will have a badquarter
ranking and even a bad-year ranking, " he says. " You need
to look at longer-term performance, and at performance over
'rolling' time periods, to get a better sense of trends. "
Committee members should evaluate the quarterly
reporting with a strategic mind-set, Lyday says. What have
they defined as the plan's core purpose? " If it's to get people
to retirement, I don't think you should really look at quarterly
performance numbers or even one-year numbers, " he says.
* Monitoring - Performance objectives
* Monitoring - Benchmarks (peer group,
benchmark index)
* Monitoring - Watch list criteria
* Monitoring - Measuring costs
* Investment policy review
Source: Russell Investments Research
toring for committees is when a fund fails to meet the parameters
set in the IPS, Olsen says. That could be due to factors such as a
performance shortfall, a manager change or a fee increase. " The
challenge is, once you've identified [an underperforming fund],
what do you do about it? " he says. " You have to decide, when a
fund is not meeting the criteria of the
IPS and goes on the watch list, what
time period do you want to allow for
evaluating that decision? That's the
squishiness in terms of the IPS. "
If a fund does not meet the IPS
standards for at least four of the last
eight quarters, Wedge recommends
making a change. " You want to be
careful in what you say in the IPS
about the watch list, so you don't
lock yourself in to making a change
quickly that isn't actually warranted, "
he says. But, in some cases, he may
recommend a fund switch sooner
than after four quarters-for
example, if a fund manager departs
and the new manager appears to be
taking investment in a substantially
different direction.
D'Aiutolo's team has a rule of
thumb that it does not like to see a
fund go more than four quarters on
a watch list, and it usually advises
making a change if a fund has been
on the list two quarters or more.
D'Aiutolo makes a distinction between relatively minor and
major reasons a fund will be watched, and these can determine
what action he recommends. If a large-cap growth fund gets
put on the watch list for the style drift of having 12% in mid-cap
equity in the most recent quarter, for example, that does not
typically argue for making an urgent change. But major developments
such as a fund substantially lagging the returns seen
for its asset class can lead to a quicker change recommendation.
Once a fund ends up on the watch list, Fiduciary Investment
Advisors likes to see a committee decide whether to remove that
fund within four quarters. " When we put a fund on the watch
list, we like to have our thesis well thought out, " Wetzel says. " We
think that if funds are on the watch list for an extended period
of time, it draws into question your decisionmaking process as
a sponsor. And I don't think fiduciaries get rewarded for taking
undue risk. " -Judy Ward
30 PLANSPONSOR.com October - November 2019
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