Download tendering exercise for investment management

Investment Committee Report on selection of Investment Manager
F 2008 24
BIRKBECK
University of London
Finance and General Purposes Committee 4 March 2009
REPORT OF THE INVESTMENT COMMITTEE ON THE SELECTION OF
INVESTMENT MANAGER FOR ACTIVE INVESTMENT FUND MANAGEMENT
At its May 2008 meeting, the Investment Committee agreed to carry out a tendering exercise
for active investment management with a view to changing our current investment
management contract with Legal & General, who provide a passive investment management
service. Legal & General were appointed on 1 August 2001 to invest in various tracker funds.
Whilst not dissatisfied with L&G's performance, the Committee strongly believe that active
stock selection and active asset allocation, as well as investment in a wider range of asset
classes to lower risk, is what is required in the current economic climate.
Terms of reference and a detailed tender specification were drawn up and 8 investment firms
were invited to tender. They were Baillie Gifford, Cazenove, Legal & General, Maia Capital,
Newton, Rathbone Brothers, Sarasin and Schroders.
All 8 firms submitted written proposals. The Committee held a special meeting in October
2008 to evaluate the proposals and agreed a short list comprising Baillie Gifford, Cazenove,
Newton and Sarasin to take forward to the interview stage.
These 4 firms were invited to make short formal presentations which would be followed by a
detailed question and answer session. The Committee also requested that Legal & General be
asked to submit a further written proposal to elaborate on their earlier proposal for a
combination of active and passive investment management. While Legal & General were not
required to give a formal presentation, the Investment Committee did take the opportunity for
a detailed question and answer session with the L&G manager at its regular meeting on 26
November. The Committee was of the opinion that the internal structure of L&G does not
authorise the investment manager to give active investment advice and therefore for that
reason a change from L&G was deemed necessary.
Each of the 4 firms presenting were asked to address specific issues either during their
presentation or during the subsequent question and answer session. The presentations were
held on 21st and 23rd January 2009. The following is a summary of the conclusions reached
by the Committee on each of the 4 firms:
Baillie Gifford is an old established fund manager based in Edinburgh with a long established
track record. The management of the Fund is owned by the partners. They proposed that
Birkbeck's funds should be invested in a Diversified Growth Fund. This is a new Fund which
aims to deliver annual returns of at least 3.5% better than the return from cash over a 5 year
rolling period with a lower risk than equities. The Fund is currently more than 50% invested
in Bonds including high yield Corporate Bonds and Investment Grade Bonds. At this stage,
the main investor in the Fund is the Baillie Gifford Pension Fund (which they pointed out
demonstrated the partners' personal commitment). Currently the size of the Fund is only
£12m, hence Birkbeck would be the second largest investor in the Fund. The Committee
rejected the proposal because of the lack of a track record for this Fund and our potential
dominance of it as well as uncertainty as to Baillie Gifford’s expertise in bond markets.
Cazenove is an independent asset management business tracing its origins back to 1823. They
manage £2.4bn of assets on behalf of over 600 Charities including many universities.
Portfolio mandates are bespoke to clients needs and are managed on a segregated or pooled
basis. Pooled Funds are invested in a broad range of charity commission authorised Common
Investment Funds across all the major asset classes. Cazenove proposed a multi-asset
portfolio for the College where asset allocation is actively managed on both a strategic and
tactical basis. The annual expected gross return is 6.7% with 9.6% volatility. The Committee
felt that the presentation was vague and the investment strategy unclear and, therefore,
rejected the proposal.
Newton Investment Management Limited was founded in 1978 and is wholly owned by The
Bank of New York Mellon Corporation. Newton has £34.6bn under asset management and is
the largest charity manager in the UK with 415 charity clients with a combined charity
portfolio of £3.2bn. Newton proposed their Absolute Intrepid Fund for the College. This
Fund is an unconstrained, actively managed multi-asset strategy with a targeted return of 4%
above LIBOR over rolling 5 year periods. Since 1 April 2004 to 31 December 2008, the Fund
achieved a gross annual return of 13.07% with 9.28% volatility. The Committee was
impressed by Newton for a number of reasons:
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the extensive range of charity clients, which included several universities as well as
some Colleges of the University of London;
the clear, thorough and thoughtful processes within the organisation;
the application of in-house research using 24 analysts;
the strategy and the performance of the Absolute Intrepid Fund since inception.
The Committee was unanimous in its recommendation that Newton should be the College's
preferred choice of investment manager.
Sarasin are specialists in charity fund management with approximately 185 charity and notfor-profit clients and £2bn of charity funds under asset management. Their asset allocation
strategy is based on global thematic equity selection. Sarasin proposed a target return strategy
for the College which sought to achieve an annual gross return of RPI+3.5% over a three year
rolling basis. Sarasin invited committee members to visit their offices in order to gain a fuller
understanding of their investment strategy and operational process. The Committee agreed
that 2 of its members should accept the invitation. That meeting made clear many aspects that
were unclear during the presentation but it was felt that there were still too many
uncertainties to recommend appointment.
Investment Committee recommends to F&GPC the appointment of Newton Investment
Management Limited as the College's Investment Manager.