Fund managers are under pressure to cut costs in the current climate, but how expendable are client service staff compared with investment staff and analysts? Christine Senior reports

As the world’s financial crisis shows little sign of abating, institutional investors find themselves buffeted by events outside their control. One reaction is a desire to get as much information as they can from their real estate managers about what is happening to their investments.

Knowledge is power, and even if the news of fund performances is bad, better to know that than be in ignorance. Investors want information, reassurance and the understanding that their needs are being met.

But in this febrile climate staff cuts have been rife among investment management staff, and often it is the client-facing staff that are considered non-core and therefore the first to face cuts.

“Lots of investment managers have had to re-examine their cost base and cut people,” says Andy Barber, global and European head of research at Mercer. “Managers, when they go through these exercises, generally are conscious of cutting into the bone, cutting investment staff, fund managers, analysts, etc. who are key. So I think the brunt of cuts tends to fall in other areas. That can include client service staff, as well as sales people, etc.

“I am aware of a couple of fund managers where I have heard from our consultants that there are fewer people involved in client service and the response time to queries is longer. On service issues generally there is less information being pumped out to them and it takes longer to get answers to questions.”

Even though at difficult times fund management houses consider client service staff the more dispensable, compared with the key money managers, staff cuts in this area could well be a bad move, since they can have a detrimental effect on client retention. Investors like continuity and want the reassurance of having a regular contact to turn to for information.

“Better managers have identified that in bad times you should increase your client servicing rather than decrease it,” says Mike Clarke, head of property distribution at Schroders. “You need to be talking to your investors more often rather than less. Clients get very nervous. The only way they can have their minds put at rest is by having regular dialogue, even greater transparency than some people have had in the past.”

Julian Schiller, head of the indirect investment team at Jones Lang LaSalle, believes investors in future will be asking for more frequent reporting, although not necessarily on a formal, written basis. They will want to be kept in touch more informally with the latest developments through regular phone contact. Investors need to feel they are being kept abreast of the latest developments, especially so if the news is bad.

“We’re seeing now investors are demanding more transparency and more frequent reporting,” says Schiller. “Investors understand this current climate is exceptionally challenging, it’s unprecedented. What they want is an honest assessment by the manager as to how it will affect their investment.

“They want to know not just on a quarterly basis, on an email shot with a report. They want to speak to a key individual maybe on a monthly basis to understand what is happening. The managers who are doing that are gaining real favour with investors. Even if the news is not always good, investors feel at least they are being kept aware of all the issues.”

The question is not one of more frequent standard reporting, but more a matter of informal contact more frequently. “Standard reporting on a quarterly basis won’t change,” says Schiller. “It’s more a phone call. They want to speak to an individual and have a more active dialogue. They want to be kept aware of how the manager is dealing with issues and hoping to resolve them.”

From the manager’s perspective it makes sense to keep a regular dialogue going with clients, because it increases efficiency. But that doesn’t necessarily mean making individual calls. Giving out information in a timely manner to all clients can avoid multiple separate responses that put an extra burden on the manager’s scarce time and resources.

“We very much believe in regular dialogue and speeding up the reporting process,” says Clarke. “Investors get nervous if you don’t get information to them quickly. They will start ringing up one by one asking you to do individual responses to them, which take up more time and use up more manager resources, which is less efficient. You can provide an increased service to create efficiency gains if you are smart about it.”

Paul McEvoy, senior managing director at DRA Advisors, also underlines the importance of maintaining and increasing contact with investors through troubled times. But not all will have the resources to do this, he says.

“Overall, I would say most managers, if they have been in the business for a period of time, are very sensitive towards investor needs at this point, and the need to ramp up communication and provide service because of the stress of the environment,” he says.

“We are very much aware of it and very proactive in continuously reaching out to investors, and even though they are asking for a lot of supplemental information we are doing that. It’s created more of a burden, but fortunately we have the resources and staffing to provide what they want.”

For all this awareness of the importance of regular communication, it appears that not all managers have taken this on board. Aidan McLoughlin, research analyst at Aon Consulting, feels that client service has deteriorated. “We have incidental evidence that reporting to clients isn’t as sharp as it has been.”

Nonetheless his advice to clients is to stick with managers if they have confidence in them. “I think, particularly in relation to property fund managers, as long as there is confidence in the management of the money then you have to advise clients not to panic or take any decisions to get out of those managers. All you can do is feed back to the manager as much as you can about what the clients expect.”

Client service is not generally an area consultants consider as an element in making manager recommendations to pension fund clients. First and foremost it is the performance that comes under scrutiny.

Any attempt to skimp on the level of information provided by managers to their clients seems short sighted at the very least. Investors expect to be kept in the picture. That doesn’t stop some from being less than open and communicative. ATP Real Estate in Denmark has investment in 26 funds, spanning Europe and the US, with US investments starting first in 2008. Ville Raitio, investment manager at the pension fund, has noticed a variety of responses from managers to the current market correction.

“What we have seen with the quite heavy correction in the market and the level of turbulence out there is that management houses have approached the issue differently,” he says. “Some have been more proactive in looking at their strategies and revising them where necessary and communicating that to the investors. Other managers have been reacting a bit more slowly.”

Raitio also warns against what he terms a “black box approach” used by managers. This is not something he has experienced directly, but knows of investors who have.

“The managers have been in the driving seat and the investors get their reporting without being able to understand it or analyse it in a lot more detail,” he explains. “I think those days are gone. It’s the limited partners’ capital that is being invested in those funds, and unless they are comfortable and aware of what’s happening with that capital then something is wrong.”

Alongside demands for more communication another outcome of the current turmoil could be a more permanent change in the structure of the relationship between investor and manager. Schiller believes the downturn will in future put more power into the hands of institutional investors to direct the way funds are run.

Investors will be demanding and getting more control. That might be, for example, by forcing a tightening-up of the guidelines that managers must operate under, increasing the occasions where investor approval of action is required. This will in turn strengthen the role of investor advisory boards.

“Investor advisory boards for funds will become more important and have a more active function than they had in the past,” says Schiller. “In the past, managers have been able to say: ‘we are going to buy shopping centres in the next three years and try to deliver X% return’. I think investors want to see managers say: ‘we are going to buy a specific type of shopping centre with these kinds of characteristics, with this kind of pricing, and it going to be in next 18 months’. It will be more specific.”

The role of the investor advisory board is likely to increase as investors flex their muscles to gain more direct influence on the way funds are managed. While in the past the boards have mainly been limited to resolving conflict situations, or for changing fund documentation or guidelines, they will in future play a more active role as a forum for investors to air their views and make their presence felt.

“It’s not that investor advisory boards are going to be that different in their make-up from what they have traditionally been, but there will be many more cases where the manager has to get their approval,” says Schiller.

A big issue in customer service is ‘key man’ retention. Investors tend to get particularly nervous at the departure of key personnel, who could be the drivers of good performance. With the recent decline or even disappearance of bonuses, managers are less motivated to stay through the promise of an end of year reward, so staff mobility is increasing.

Investors are particularly keen on incentives that managers have to hold on to their key people. One strategy is through the alignment of interest between the key fund manager and the fund itself.

“A lot of investors looking at new funds want to know what is the alignment of key individuals within the fund, how much skin they have in the game,” says Clarke at Schroders. “Clearly carried interest is one. If you allocate a percentage of carried interest or performance fee to staff, that gives them a motivation to stay. But probably the best way of all is to have people put their own money in. It’s not just a bonus for the future, it’s their hard earned cash invested from day one. That is the model for opportunity funds that is requested by many investors. Most managers in that space go along with that.”

In Schroders’ UK Opportunities Fund, the core team not only has a share in the performance fee but has to co-invest their own capital as well. Although this is a feature mainly of opportunities funds, some value-add funds also have a similar arrangement.

Another important area of investor concern in the current climate is around future debt maturities. Investors are asking for details of when debts mature and future needs for refinancing. Where banks are unwilling to lend more when loans mature, investors may face more calls for cash.

“The investor has to make a judgement whether they want or can put more money in, particularly the endowment funds,” says McEvoy.  “Many funds are overcommitted in these more illiquid areas and don’t have the comfort or ability to fund more equity into a deal, though it may be the right thing to do.”

Looking to the future, Schiller expects investors to place a much greater emphasis on the debt management capability of their managers. “The CFO role in an organisation has become more important,” he says.

“Investors want managers to demonstrate a lot more knowledge, capability and sophistication around debt. A number of funds have suffered from the strategy they have employed with regard to debt. I think we will see investors really putting more emphasis on due diligence around a management team’s ability to deal with debt management.”