But when the Queensland Investment Corp of Brisbane, Australia, pension fund used internet technology in the process of selecting a manager for more than $300 million in assets earlier this year, it marked the first time that new economy techniques had been applied to a long-unchanged market practice.
Rather than filing through numerous proposals from a range of money managers, the fund used technology to streamline the process of narrowing down the field to a short-list of candidates that suited the performance goals and investment preferences of the portfolio’s trustees and investors.
And although the fund’s overseers still applied the same due diligence to selecting the final candidate – in this case, PaineWebber Group subsidiary DSI International Management – the fact that they could easily identify best-of-breed providers enabled them to cut considerably the time it took to choose a money manager.
Indeed, the internet is transforming the beauty parade, and at the apex of change is InvestorForce.com. Barely 20 months old, the US-based company is bringing interactive database technology to manager selection.
“The process of selecting money managers hasn’t changed for 30 years – until now,” says Peter Flynn, InvestorForce.com’s London-based general manager for Europe. “The RFP [request for proposals] is still a paper-based process, and plan sponsors still have to pay someone to crunch the numbers. It’s blindingly obvious that there are more efficient ways of doing this.”
To expedite the section process, investorForce.com is providing plan sponsors with tools that break down funds across a number of categories, including asset class, geographic focus, style and – most important – performance. This proprietary product suite, which plan sponsors can access via the internet, allows them to evaluate money managers and narrow down their focus ahead of selecting the final candidates.
In addition, InvestorForce.com also is providing news, research and analysis, panel discussions and chat-room forums to end users in a bid to make its website a portal of first choice for plan sponsors and money managers alike. The company is even reaching out to those that stand to lose the most from its more widespread use: pension fund consultants.
“We’re not out to disintermediate consultants,” says Flynn, who joined the company in September after nearly a decade as a marketing specialist at investment manager Robert Fleming. “The area that is the consultant’s space – and one that’s difficult to fill – is the qualitative, value-added research into money managers. If we are in any way in the consultant’s space, it’s from being in the data collection business. So consultants who confuse qualitative advice with quantitative number-crunching are slightly threatened by our business proposition.”
| Flynn: more efficient number crunching | ||||||
The InvestorForce.com business model works like this. The company provides its data free of charge to plan sponsors and smaller pension fund consultants, enabling them to gain a better handle over the volumes of information they receive during a normal RFP process.
After a short-list is selected, the money managers identified are informed of their position as a finalist for the mandate in question. They then are invited to participate, provided that they agree to pay InvestorForce.com 5% of the value of the first year’s management fees they would secure if they won the mandate. If a company does not win the mandate, it pays nothing to participate in the final beauty parade.
“We’re getting paid for giving the industry transparency, technology and functionality,” says Flynn, noting that the company has poured the bulk of the $73 million it has raised thus far from a range of investors into the development of its database and search engine applications.
“Of course, this doesn’t preclude a consultant putting in value-added, qualitative advice in the final stages of the money manager selection process,” he says. “So at the final interview, with the last four or five present, the consultant comes in and helps the plan sponsor evaluate the most effective money management solution. But we do pose a threat to those consultants who seek to gain from the provision and analysis of readily available, quantitative data, because that’s what we’re giving away.”
Thus far, InvestorForce.com has been able to register more than 2,000 money managers in the US, where it derives most of its business. And those managers handle well over $6 trillion in assets for contributors.
In addition, some 800 consultants also regularly use the site. In Canada, an additional 200 end-users are registered, and the company’s initial Efforts in the UK have produced 500 registered users since June.
Still, despite the strong response from pension funds, selling the service has proven somewhat problematic. Fewer than two dozen online searches have been conducted through the site.
“The process of selecting money managers hadn’t changed for 30 years,” Flynn says. “The really hard thing is to change behaviour. Pension plan trustees are conservative with a small ‘c’. They are focused on matching assets to long-term liabilities, so they aren’t necessarily going to leap into the latest fads. It’s an educational process, but the fact that we’ve been able to raise capital is indication of the validity of our value proposition.”
So far, InvestorForce.com has been highly successful in attracting investors. Among them are such buy-side powerhouses as the California Public Employees’ Retirement System (Calpers), as well as Merrill Lynch, Mellon Ventures and Thomas Weisel Capital Partners. It used a portion of that funding in September to acquire Altvest.com, a firm that specializes in hedge fund tracking and evaluation.
“The institutional investors and consultants that use the site were telling us that hedge funds and other alternative investments are becoming increasingly important in their portfolios,” says InvestorForce.com CEO Jim Morrissey of the Altvest.com acquisition. The company has been more successful than other, similar Efforts, including one that generated some initial interest but then failed to secure subsequent funding.
According to Flynn, the company’s ability to meet its initial sales targets translated directly to the boost in investment. Moving forward, the company hopes to add retail information and evaluation tools to further expand its revenue base.
“Clearly, end users are going to want to do some due diligence,” Flynn says. “But what this site does is enable a plan sponsor to initiate fewer RFPs, alleviating the costs associated with crunching those numbers. They can get to the best-of-breed providers and then focus their due diligence Efforts on those companies.”
