Leveraging your manager's best ideas
By James Perry
Guest Columnist
The formal study of finance teaches fundamental hypotheses and theories to explain market behavior and techniques for portfolio construction, while direct experience can bring to light the limitations of those tools and how ruthless a bear market can be. Though both types of study enhance knowledge, thoughtful allocators may additionally benefit from partnering with skilled asset managers who can provide them with market insight that may assist with efficiently allocating capital and weathering inevitable market storms. This approach is at the heart of the Managed Custody Account (MCA) structure which seeks to leverage partnerships between asset managers and allocators to effectively improve governance, allocation decisions, and portfolio performance.
Typically, investors allocate capital to a single investment strategy or fund at a time to which the manager has a fiduciary obligation. However, the manager has no obligation or incentive to advise the client regarding investing or rebalancing into other strategies. Under an ideal investment structure, a manager would utilize their insight to assist their clients in growing and protecting capital through informed rebalancing and would be compensated for the value they add across the entire relationship.
In today’s low-yielding environment, institutional investors are under increasing pressure to generate returns in excess of an assumed rate. Finding innovative ways of redefining the traditional relationship between allocators and managers can play a significant role in improving portfolio performance or meeting a target rate of return. The idea of a relationship-based structure and compensation agreement is the foundation of the MCA structure.
An MCA creates a template for establishing strategic partnerships between asset allocators and asset managers that seek to:
· Create a governance structure that allows them to work together more efficiently;
· Make the asset manager a fiduciary to the allocator at the relationship level instead of at the individual fund/asset level;
· Enhance alignment of interests, usually through a fee netting agreement which increases compensation for the manager based on the success of the overall relationship rather than the individual sleeves or investments; and
· Reduce contracting time and costs by capturing key terms in the MCA agreement.
Despite the benefits of the MCA structure, it is not without its challenges. Investors need to find managers who they believe would communicate valuable market insight and provide strong relative performance across multiple strategies or structures. These allocators also need strong investment teams capable of quickly reviewing and evaluating investment recommendations. The structure also increases reporting complexities and may necessitate the use of a third party administrator to address the operational challenges.
The MCA structure remains an innovative tool for creating strategic partnerships between asset managers and investors and affords institutional investors access to investment managers' best ideas and highest performing strategies under a construct that improves the alignment of interests between both parties. By using MCAs, sophisticated investors have the ability to dynamically allocate capital and generate stronger risk-adjusted returns that will benefit them, their sponsors and the ultimate beneficiaries of those institutional investment programs.
Click here for more information on the MCA structure.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Maples Fund Services or TEXPERS.
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| James Perry |
About the Author:
James Perry is head of Institutional Investor Solutions at Maples Fund Services where he is responsible for shaping the firm’s offerings and enhancing its service delivery to institutional investors. He brings more than 20 years of investment management experience including senior investment roles overseeing portfolios of public assets in California and Texas. Perry is a recognized thought leader in the investment industry, as evidenced by a number of awards, including being named as one of the Top 30 Pension Fund Chief Investment Officers (Trusted Insight, 2016) and receiving the Investor Intelligence Award for Innovation (Institutional Investor, 2014).
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