Implementing a risk assessment when managing change

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Institutional investors face some difficult decisions after concluding that an investment manager will need to be terminated. In some situations, the resulting termination has nothing to do with the existing manager.

Changes in strategic asset allocation or structure (going to Global Equity from EAFE/US Equity) result in winners and losers of assets. In other situations, a plan sponsor may have lost confidence in the investment manager due to the failure of one or more of the 4P’s of investment management research: People, Performance, Process, and/or Philosophy. Breaking up is hard to do…

Don’t take your love away from me, don’t you leave my heart in misery, if you go then I’ll be blue, cause breaking up is hard to do. – Breaking up is hard to do, Neil Sedaka

While the decision to leave a manager is difficult, plan sponsors must find answers to important questions.

  • Do I cut ties quickly or stay with my existing manager until a replacement has been appointed?
  • How long will this take?
  • What are the risks of doing something vs. nothing?

These questions should not cause undue anxiety for a plan sponsor. Although there are many options available, undergoing a risk assessment can help guide plan sponsors to a satisfactory conclusion. A risk assessment is a straightforward exercise that assesses the key risks involved in making changes to the portfolio. We have worked with various clients to develop a risk assessment to help them decide whether to use a Temporary Assessment Management solution to bridge the gap between termination and a new funding. To reach a decision, we walked clients through the following questions.

What type of change is being made?

Asset allocation or structural change When the main factor for terminating a manager is related to an asset allocation or structural change, the urgency to make an immediate change is less critical. Even so, it’s important to determine whether the new asset class or structure has a tradeable index. For example, if the asset class shift is to Emerging Markets, there are beta solutions to get immediate exposure. However for some alternative asset classes, such as infrastructure or direct real estate, there are no tradeable investments matching the desired investment characteristics.

Failure of one of the 4P’s of investment management research

When the main factor for terminating a manager is related to one of the 4Ps, the urgency to make an immediate change is escalated.

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