Friday Letter Funds of funds vs. consultants

Townsend this week threw down the gauntlet to fund of funds managers by hiring ex-ING multi-manager head Nick Cooper, raising concerns among fund of funds managers about losing business. 

This week’s news that US real estate consultant The Townsend Group has beefed up its multi manager capabilities in Europe and Asia via a high profile appointment was not an overly joyous event for real estate fund of funds managers.

In an environment where investment dollars are hard won, they didn’t want to hear a high profile professional such as ING’s former fund of funds head, Nick Cooper, was joining such a large consultant to help grow its business.

Fund of funds managers have been privately telling PERE there is mounting concern that investment consultants are diverting business away from them. Townsend’s announcement therefore has solidified feelings that an increasing number of consultants are positioning themselves as a “de facto fund of funds”, claiming they can do underlying fund selection as well as any other multi-manager.

There are two implied criticisms in the concerns. One, that in trying to secure capital commitments through consultants, fund of funds present their best investment ideas, which can then be used by consultants to provide multi manager advice about the GP in question to clients. The second criticism is that some generalist investment consultants can’t do the job of manager selection as well as a niche fund of funds and are unable to provide impartial manager selection advice if they operate a fund of funds themselves.

It is hard to gauge if this is just trash talk or if the fund of funds managers are onto something. Townsend’s announcement illustrates that consultants are staffing up in this area. It’s an issue that warrants further examination, but the capability and experience of the investment consultant matters a lot here.

So long as the investment consultant has the capacity to do its own homework on the full spectrum of fund offerings, and so long as the consultant acts in the best interest of the client, there shouldn’t be any issues. Of course, all clients should be made aware of any potential conflicts of interest.

As one global consultant said, if a firm has a large research capacity it can make both direct manager selections and fund of funds selection. “With conflicts, perceived or otherwise, the best way to deal with these is with transparency.”

The consultancy added: “If a fund of funds manager decides they do not want us to research them in case we see their best ideas that could be used in direct searches then we completely understand. It is just that we will not be able to put them forward for business for those clients that want a fund of funds.”

And therein lies the rub. Fund of funds managers need consultants to progress their own business, but don’t want to give away their proprietary edge.

Unfortunately, for the multi-manager this is one of life’s annoying things that needs to be endured. But with a bit of luck, and if the market continues to improve, perhaps it won’t hurt so much in future. See the May issue of PERE magazine for more details.