Ramon Tol – The art of manager selection

The job of most fund selectors is to pick the best mutual funds to invest their clients’ money in. Ramon Tol, who is responsible for external manager selection for the equity investments of Dutch pension scheme Blue Sky Group, does it slightly differently. Like many institutional investors in The Netherlands, he does not select mutual funds as such, but picks external managers instead.
“After a search project has been finalised and the manager has been appointed, we ask him to invest our money through a segregated account at our custodian,” Tol explains. While most institutional and wholesale investors work with fund buy lists as the basis for their external investment policy, Blue Sky Group does not do that. “We do not work with buy lists as we tend not to directly invest in mutual funds, but we have a reserve list containing managers that we do not currently work with. These are the first managers we would consider when starting a new search,” Tol says.
Blue Sky Group was originally established as the investment arm of national Dutch airline KLM, and is among the five largest pension schemes in The Netherlands, with assets under management amounting to €17bn. “What we do is select and monitor external asset managers. We work with a pool structure; for every sub-asset class (for instance US large caps) we have a pool up and running, which exists of several managers. Our clients then participate in these pools,” Tol explains. “In fact, you could say we are a multi-manager with our pools representing a manager mix for each investment category, like for example US large caps. For this asset class we employ four different managers, for an equity pool containing less assets it’s usually two.”
That explains why Tol’s business card says he is a fund manager even though his job is in practice more like that of a fund selector. “Our structure is actually quite common among pension schemes and other institutional investors in The Netherlands, but it is indeed quite different from the way institutional investors across Europe tend to work, in the sense that we use
segregated accounts instead of mutual funds.”

Under scrutiny

So why did Blue Sky Group choose this model to select external managers?
“There are several pension schemes in The Netherlands which do it like us. An important advantage of our model is that it offers economies of scale, and is easily accessible to new clients,” Tol says. Blue Sky Group not only caters for the two KLM pension funds – although they still account for the vast majority of assets under management – but also provides investment services to a number of other pension funds. When taking on a new manager, Blue Sky Group takes them through a thorough selection process. The pension scheme first screens the asset managers and their teams it is considering by looking at both performance and style consistency and subsequently reviews the company as a whole. “We ask them about 10 pages of questions before we even go out there and see them,” Tol explains.

Core values

Asked what qualities he values in fund managers, Tol keeps it short. “We care about things like the
transparency of the investment process. Consistency is also important for us: we prefer managers with a consistent style and constant performance. Besides that we prefer asset managers doing things differently. Last but not least, asset management teams we work with should preferably
have a low team turnover. We prefer people who stay on a fund for an extended period of time.”
All of Blue Sky Groups’ fund managers have access to their portfolios via segregated accounts at the custodian bank. “The custodian checks on a daily basis whether the managers comply with all investment guidelines, and immediately notifies us if one of them breaches our investment guidelines
by for example investing too much money in cash or in derivatives. If anything happens to the asset manager we have entrusted our money to, the money is safe because it is ringfenced by the custodian.”
Tol works with both boutiques, especially in the emerging and frontier market pools, and also some of the bigger asset managers. “The advantages of boutiques for us are that they can pay much more attention to managing and monitoring the account. You often see they are better motivated and eager to
outperform. On the other hand, they are often financially vulnerable and the composition of their teams tends to change frequently. Boutiques are normally dependent on one or just a small number of people.”
Unsurprisingly, Tol does not scrutinise asset managers so thoroughly just to drop them again the next year. “On average, we switch mandates in each pool about once every five years,” he says. “We only change managers on a more regular basis in the emerging markets, because the composition of teams in this region is unstable and manager teams regularly change positions and companies.”

Reducing volatility

Blue Sky Group carries out both active and passive solutions for clients, although slightly more than 50% of Tol’s mandates are actively managed. “An advantage of passive equity mandates is that they can be used cheaply for implementing tactical asset allocation bets. Furthermore, they can be used to steer the overall tracking error of the equity portfolios, and this is what we mainly use passive equity mandates for,” Tol explains.
“If you only invest in active funds, it is more difficult to have your tracking error not to exceed the maximum level agreed with clients.” To reduce the volatility of the equity portfolio, Blue Sky Group invests 20% of the total equity sleeve in low volatility strategies. “For that purpose we have a balanced
mix of four defensive equity managers. Lower volatility of an equity portfolio is appealing for institutional investors since it results in a reduction of the volatility of the coverage ratio, all else being equal. A stable equity portfolio namely implies a more stable coverage ratio, which pension fund boards tend to like.”
Blue Sky Group does not invest in long-short funds and never has, although they did consider 130-30 extension strategies a few years ago. “We consider the fees long-short funds charge too high while the investment process is often not transparent, so we do not invest in them,” Tol says. “Most of the promised alpha of these strategies is probably much more of a beta play, so can be achieved more cheaply using beta replication strategies.”

Part of the Bonhill Group.