Do Consultants Help Investment Returns? | Chief Investment Officer

What difference does engaging an investment consultant make to an institutional investor’s performance? That is difficult to gauge, but allocators do find them useful, according to a panel on the subject of consultants.

The webinar on October 19, featuring two CIOs and a consultant to asset managers, was the latest in the CIO Allocator Insights Series, and a recording is available. Amy Resnick, executive editor of CIO, moderated the session.

“How [consultants] helped investment performance is hard to measure,” said panelist Bob Jacksha, CIO of the New Mexico Educational Retirement Board (assets: $16 billion). “But I know they have been additive to us.”

Consultant Tyler Cloherty, managing director and the leader of the Casey Quirk Knowledge Center, pointed out that studies on the efficacy of advisers were “inconclusive.” How well the partnership between asset owners and consultants works “depends on how the relationship is structured,” he continued.

Noting that his fund is “underwater”—its funded level was 63.5% as of its 2022 annual report—Jacksha noted that consultants “add value.” After all, he said, “you don’t want things to go south.” Over the last three years, the fund has averaged an 11.2% annual return. Jacksha was the winner last year in the CIO Innovation Awards public defined benefit plan category for funds with between $12 billion and $20 billion in assets.

Jacksha made it clear that, as his public pension fund has limited staffing, consultants serve as an “extension of staff.” Consultants also run co-investments for the ERB, particularly “fund of one” arrangements in some alternative asset classes.

Good consultants offer a “private Yelp service” recommending which outside managers to hire, said Abdiel Santiago, CEO and CIO of the Panama Sovereign Wealth Fund ($1.5 billion), who won last year in the sovereign wealth category at the CIO Innovation Awards. Panama’s fund lost 8.6% in 2022 but was up 2.9% the year before that.

Santiago stressed that consultants also help with monitoring or “maintenance” of the Panama fund’s long-term investments, especially as staff can be focused on the “front end” of new investment commitments.

Regarding benchmarking the performance of consultants and their recommended investments? Stocks and bonds have indexes, of course. Areas like natural resources and real assets are measured against CPI-plus a factor. Jacksha said his fund uses “a number of lenses,” including how peers are doing.

The two CIOs hire consultants that specialize in certain areas. Those focused on equity and fixed income are the easiest to find, Santiago said. Other areas may be more challenging in which to find experts, the “dusty corners,” Jacksha observed—he has hired some for such niches as music and drug royalties.

Putting the specialists together is “Lego-ish,” Santiago said. One rule, he went on, is “not to step on them.” Jacksha said his fund could hire consultants for four years, then they could be renewed for two-year extensions or, sometimes, given another four-year contract.

During the pandemic and its aftermath, Cloherty said, there was a large turnover of consultants to funds. Consulting firms have consolidated lately, too. In these economically turbulent times, he said, it’s clear allocators “need more support to guide them.”