Are investment consultants trying to take on fund of funds managers at their own game? Richard Lowe explores what is becoming an increasingly confusing space for investors

In early 2009, the US-based Townsend Group set up shop in London and appointed Adam Calman as head of Europe. The company, which has traditionally worked with the likes of CalPERS and numerous pension plans in the US on their real estate investments, said at the time it had two objectives in establishing a European headquarters: first, to assist its US-based clients to invest in the UK and Europe; second, to begin looking for new clients outside the US.

It was the latter that caught the eye of the UK’s well-established pension investment consultants, such as Mercer, Towers Watson and Hewitt Associates. Were they going to have to defend their market share against a new kid on the block?

Then came the news that Townsend had hired Nick Cooper. As head of ING Real Estate Select, Cooper helped develop one of the first multi-manager platforms in Europe, and so his move to Townsend - joined soon after by ING Real Estate Select’s Asia Pacific managing director Nicholas Wong and Europe CIO Damien Smith - suggested that it was not only the pension investment consultants who needed to be concerned.

Some commentators concluded that Townsend was effectively throwing down the gauntlet to fund of funds managers and multi-managers, and that investment consultants would begin to encroach on their space.

However, according to Calman, this is all part of a misunderstanding of Townsend’s business. Townsend is categorically not a consultant in the European sense of the word. “We are a multi-manager - that is all we do,” he says.

The source of the confusion comes from nomenclature in the US where firms like Townsend, which select and monitor real estate funds on behalf of institutional investors, are legally prevented from describing themselves as investment managers. Rather than multi-manager mandates they are described as discretionary or non-discretionary consulting agreements, with the latter requiring assent from pension fund trustees for all capital commitments and changes in strategy.

“So when we come to the UK and Europe people think: ‘Townsend, big consultant’,” Calman says. “They put us in the Mercer box, which is totally wrong. We are much more investment manager than consultant.”

Calman says the confusion has cleared up and the major investment consultants are now well aware that Townsend is not looking to compete in their space. “Our role is to assist our clients in gaining property exposure,” Calman says.

But there is a potential for overlap between multi-managers and investment consultants that offer fund selection services. For the time being the latter seems to have been restricted to helping UK pension fund clients invest in a small number of core, balanced UK real estate funds, whereas a multi-manager is more likely to be employed to offer access to more specialist funds or for a pan-European or global basis.

Nick Duff, head of property at Hewitt Associates, says that it often makes sense for smaller pension funds seeking to gain a core exposure to UK to invest in one or two balanced funds with diversified portfolio of core assets. This is something that Hewitt can assist with, he says.

Duff stresses that by offering this service Hewitt is not competing with multi-managers or fund of funds managers. “We have some clients that prefer to work with us in terms of picking individual funds, and those individual funds might end up metamorphosing into a portfolio of funds,” he says. “We’ve also got some clients that want to look at particular themes. So it might have been UK recovery funds or it might have been residential property funds, and we can advise on that. But we certainly don’t market ourselves as fund managers.”

Graeme Rutter, head of UK property multi-manager at Schroders, confirms much of what Duff says. “To date most of the focus of investment consultants has been on core funds that they hold for smaller clients. We have seen limited overlap in the sector-focused fund and niche fund areas.”

Rutter says Schroders is aware of the potential conflicts of interests in this area, whereby consultants have access to the internal workings of multi-manager businesses when conducting searches for clients - insights they might be able to use to their advantage when developing their fund selection knowledge. “We are wary of encroachment into our area of practice, but our relationships with the consultants is generally very good - as it needs to be to best serve the interests of our mutual clients,” he says.

But Calman questions why investment consultants offer fund selection advice for real estate when they do not do the same for other asset classes. He agrees this is limited only to investments in UK funds for smaller pension funds, but sees it as consultants slowly “creeping” into the area.

It certainly is an area into which consultants could look to expand. In June, Mercer hired LaSalle Investment Management’s head of indirect investment to run its European real estate boutique. The new outfit offers a number of services, including due diligence on managers and strategies, performance reporting and ongoing monitoring of investment managers.

Hewitt also recently announced that it was acquiring US-based consultancy EnnisKnupp, which as well as offering more generalist investment consulting, does offer discretionary and non-discretionary consulting agreements for real estate. Heather Christopher, real estate associate at EnnisKnupp, says the firm offers a range of services from project assignments to retainer agreements. The consultancy was conducting searches for fund of funds managers for two clients, but it is also set up to enter into non-discretionary style arrangements.

Germany’s Feri EuroRating Services offers a similar range of services, from a top level asset allocation analysis, involving asset liability studies, to help with selecting fund managers. “Asset allocation can be completely independent of manager selection,” explains Wolfgang Kubatzki, head of real estate at Feri. “We act as a consultant, maybe setting up specialised vehicles for investors or working as an adviser to set up multi-manager funds.”

Traditional multi-managers and fund of funds managers have questioned whether consultants have the necessary infrastructure to maintain a continuous monitoring of real estate funds. “We live in a free market, so everybody is free to offer whatever services they want,” says Alexander van Riel at ING Real Estate Select. “Clearly they are competitors for us and we have to show where we are better. I think, well there’s nothing wrong, if they do so, but they also need specialist teams to work on this.”

Duff believes that fund of funds managers and multi-managers have a role to play for some clients, but he says that many have not necessarily added any value during the downturn. “Some of their stock selection hasn’t been great,” he says. “Some of the write-downs have been quite significant, when you compare it to a straightforward pan-European balanced fund.”

Calman is keen to not only separate Townsend from investment consultants, but also from companies that operate both multi-manager platforms, pooled fund of funds products, and other real estate investment products and services within the same group, such as single funds or direct investment. “The differentiator for us is we are not running our own in-house product,” he says. “We don’t invest in direct real estate.”

Calman points out that Townsend has more than $100bn (€76bn) in global capital in which it invests in real estate on behalf of its clients, and has committed $4bn to nine funds in the first half of 2010. He expects these figures will dwarf the equivalent numbers at other multi-manager platforms, whose parent companies invariably have more money in their direct investment businesses or single in-house funds.

This volume of capital allows Townsend to gain access to exclusive investment opportunities with large investors that require ‘big ticket’ commitments. Calman cites Townsend’s involvement in a $4bn investor consortium alongside four sovereign wealth funds, set up by Brookfield Asset Management, to target distressed opportunities. “You would never get into that club unless you have half a billion dollars as a limited partner, minimum ticket.” he says. “We are representing 15 of our clients with that ticket.”

But it is not only Townsend that is confused about indirect real estate in Europe. The real estate section of Partners Group, the Swiss-based investment manager with expertise in alternative asset classes, including private equity and hedge funds, is sometimes perceived to be a multi-manager. The UK’s Strathclyde Pension Fund recently hired the firm to manage its global real estate exposure, which it called a “multi-manager mandate”.

But Partners Group does not consider itself a multi-manager. “We are global integrated real estate managers,” says Claude Angeloz, partner and co-head of real estate at the firm.

What does this mean? Partners Group aims to identify the best top-down relative value opportunities in real estate globally from a market fundamentals perspective, after which it will identify the best bottom-up opportunities in the most attractive target segments. It is only then that it will look at the different means of accessing those opportunities. “We’re generally agnostic whether we invest in properties directly, buy portfolios and fund interests in the secondary market, go through funds, or set up a separate account with a business partner that we want to work with for a specific sub-market,” he says. “As long as we get access to the target markets and properties, we will take the best road that leads our clients and us to Rome.”

To illustrate the point, Partners Group is currently positive on three main investment opportunities: recapitalisations in mature western markets, buying secondary interests in existing real estate funds, and investing in emerging growth markets.

“We believe that if you restrict yourself to a pure fund of funds or multi-manager approach, and you only look at newly launched funds, you miss out on a lot of other opportunities. For example, you are not able to capture today’s market valuations and attractive opportunities. In our view, the classic fund of funds approach is a concept of the 1990s and today’s market offers more instruments that you should use as a global property investor,” he says.

Another Swiss-based firm, Swisslake Capital, often gets described as a fund of funds manager also. “I wouldn’t define our approach as a fund of funds,” says CIO Volker Wiederrich. “I’d rather say it is an investment adviser and manager, meaning that we manage portfolios for our clients, specific to their needs.”

Wiedderich does not believe that traditional fund of funds products meets the requirements of investors in the current environment. “Some of the fund of funds products have overlapping strategies and the single funds they choose are not really focused,” he says. “After the crisis, some investors have become more and more specific regarding their investment strategies.”

CBRE Investors multi-manager business has certainly responded to the post-crisis investment environment with the news that it would target club deals as well as traditional funds as part of its multi-manager service and fund of funds products going forward.

Jeremy Plummer, head of global multi-manager at CBRE Investors, says that the move to club deals by the world’s largest real estate investors means that smaller investors need new ways of accessing the best market opportunities.

“The big investors that used to invest in funds are using a more granular model, looking at smaller, more specialist funds and more specific transactions,” Plummer says.

“The challenge for everyone other than the top 10 - the sovereign wealth funds, the biggest capital sources that have in-house teams - is how do you get access? You used to rely on the global opportunity fund or so-called asset allocator fund that would go out and partner with other operating partners. If that model is broken and you still want to invest in local operating partners or managers you need another way of finding them,” he says “That is where we hope we can play a significant role.”

Plummer says CBRE Investors can call on its parent group’s strong presence in the direct markets in order to not only underwrite fund managers but to underwrite the real estate in smaller, club-like deals. And this change in the market will be a long-term trend.