Outsourcing the Investment Function

1
Outsourcing the Investment Function

A Bill Bogan/Kent Olson Production June 14, 2006
2
QUESTION

• Is outsourcing the answer and, if yes, then how
  do you manage the managers?

3
Advantages of Outsourcing

• Professional Management with enhanced research
  capabilities
• Greater Diversification among investments
• Specialized investment niches can be utilized
• Investment returns should be higher
• Frees up staff time to focus on other issues

4
Disadvantages of Outsourcing

• Some loss of control over cash management
• Will require staff time to oversee the
  manager(s)
• Greater investment management costs versus
  in-house management costs

5
Issues

• Portfolio Size
• Number of dedicated investment staff
• Sophistication of investment staff
• Legal matters

6
Portfolio Design

• Portion of Portfolio to Outsource
• Determine Asset Classes in which to Invest
• Efficient Frontier Analysis
• Use of Commingled Accounts
• Use of Separate Accounts

7
Methods to Select Managers

• Consultant based search
• Similar to pension manager approach
• Screen down from data base
• Interviews
• Develop a short-list for government to interview
• RFP process

8
Items to Focus On During Selection Process

• Ownership
• Compensation
• Client/Employee Retention
• Performance
• Returns
• Risk (standard deviation of returns)

9
Establishing Benchmarks

• Benchmarks should be similar to investment
  classes and maturity of investments
• Investment Mix
• Duration
• Quality

10
City Council Action

• IF NECESSARY
• Add new asset classes by Ordinance
• Revise the Investment Policy
• Approve the Manager Agreement(s) for a separate
  account

11
Monitoring the Managers

12
Monitoring the Investment Manager

• Investment Policy
• Contract Compliance
• Performance (Show Me the Money)

13
Staff Requirements

• Monitor the Managers performance
• Ensure compliance with manager agreement and with
  the Investment Policy
• Review and/or prepare periodic reports of the
  managers investment activity to Investment
  Committee and/or governing body

14
Investment Committee

• Committee members
• Composition
• Meeting Frequency
• Committee functions
• Review investment performance
• Make recommendations for policy changes to the
  investment policy
• Staff Reports
• Meeting minutes
• Investment Reports

15
Manager Reports

• Returns
• Holdings
• Transactions
• Compliance with Investment Parameters

16
Independent Performance Consultant
Reports(Separate Accounts)

• Returns/Comparisons to Benchmark
• Duration/Maturity
• Credit Quality
• Asset Classes
• Compliance Issues

17
QUESTION 1. Is outsourcing the answer and, 2.
If yes, then how do you manage the managers?

• ANSWER
• Maybe
• See previous slides