Market Shake-Up Yet to Impact RFPs Market blowups often lead to changes in the due diligence process, but observers say it may take a while before concerns about credit exposure and equity market volatility translate into more detailed requests for proposals (RFPs) from institutional managers. The industry has seen a string of blowups in the last year rooted in sub-prime mortgage debt or connected securities. While some investors have taken direct hits from collapsing hedge funds, it’s the ensuing market slowdown that has done the most damage to pension funded status. A decline in funding levels in the first quarter largely canceled out gains made in 2007, as reported in FUNDfire. In fixed income, investors may probe managers more extensively about underlying mortgage exposure. And weak returns across the board could cause institutional clients in particular to lose patience with underperformance, forcing managers to open up their investment process to even greater scrutiny. But consultants say it’s too soon to predict how the present market environment will affect RFPs and due diligence. “There’s going to be a lag between what’s happening in the current market, and how that gets accurately reflected and how questions are developed in the RFPs,” says Callan Associates senior v.p. Cliff Axelson, manager of the consultancy’s New Jersey office. Callan has worked with clients “on a much more intensive basis” in recent months to evaluate the market and to take advantage of opportunities opening up, Axelson says. But most investors will wait until the dust settles before making any adjustments to their allocations or investment process. Search activity has not spiked in response to weak returns. “What we have seen is that most plan sponsors right now are kind of in triage mode, trying to figure out what the current impact is on their portfolios and to provide information as to what that means going forward,” says Axelson. “Consultants so far haven’t radically changed the construction of the RFPs they’ve been putting out,” says John Laurino, CEO of Proposal Software, which provides workflow solutions for proposal writing. “But that’s only because, in the last couple of years, the complexity of these documents has gone up exponentially.” Laurino expects the process to grow more complex in the coming years. “The size of RFPs is only going to get worse,” he says. “I don’t think that shoe has dropped yet.” In the short-term, any changes to the due diligence process would likely be seen in individual client meetings or specific communications between consultants and managers that have had to close strategies or funds. Any broad changes to consultant questionnaires would probably arrive in 2009. “The institutional market moves very, very slowly,” says Donna DiMaria, president of the Third Party Marketers Association (3PM) and principal of Tessera Capital Partners. “If we do see some fallout come from the market problems we have with the sub-prime crisis and the volatility that we had in January, I think you’ll see it next year.” Two factors may slow a revamping of the RFP process. First, the direct impact of subprime exposure on asset management is hard to gauge, as the devastating write-downs at some of Wall Street’s largest investment firms have hit corporate balance sheets harder than investment products. Consultants will be hard-pressed to generate questions that would have predicted the credit crisis. Heath Wilson, principal of eVestment Alliance, says he has seen no “push-back” from consultants to add items to the company’s questionnaires to address the current market environment. Second, institutional investors are already well-guarded by consultants that have undergone at least one market crisis. Callan’s Axelson says risk controls built into institutional portfolios after the bursting of the technology and telecommunications bubble in 2000 and 2001 have helped portfolios weather the current crisis. “Overall, these risks controls have worked,” says Axelson. “And so there’s no reason to react now. We’re evaluating the situation. When things start to become more stable, we can then determine what the best course of action is.” |
