Wilshire Consulting announced it will assist the $31 billion Iowa Public Employees Retirement System (IPERS) in a search the firm calls the first of its kind.
The unique search, known as the “Alpha Search,” is a three-phase process that seeks to find investment management firms based on their ability to deliver alpha regardless of beta. According to IPERS’ request for proposals (RFP), the first phase will primarily collect return information concerning potential products, which will then be quantitatively evaluated and scored. Phase two will notify managers and request them to submit additional information regarding their investment processes, portfolio construction, risk management processes, and other aspects of the product or firms they represent. Once the evaluation committee determines which managers make the cut, phase three is due diligence, which includes on-site visits with prospects to determine the right fit for IPERS.
“This approach separates beta and alpha decisions. We will evaluate all types of public market active strategies at the same time. Each strategy will be evaluated in terms of how it can help IPERS meet its return objectives within our active risk budget—not just how well the strategy has performed against its asset class benchmark,” Karl Koch, CFA, IPERS’ CIO, said in a statement.
After a successful test of a smaller version of the search in a previous program, IPERS’ board and staff decided to try it out on a larger scale. This led to the creation of the Alpha Search.
“One of the things that we’ve been discussing internally for some time is to is to see if we can harness other different sources of active risks, active returns” said Sriram Lakshminarayanan, the RFP coordinator and IPERS’ Chief Risk Officer told CIO. “So, we wanted to go out and do a search where we re-look at all different sources of active risk. And during the process, evaluate our existing sources of active risk and see what kinds works best for IPERS’ needs of active return.”
Lakshminarayanan added that to deliver the best results and avoid any biases, IPERS will conduct the first two phases “blind, on a no-names basis,” which contributes to the uniqueness of the search.
“During this phased process we want to do two things. We want to first identify returns with the qualities that are really important for IPERS. The second thing is to try and put together a diversified alpha source. We want to make sure we don’t have active managers that all behave the same way.”
To be considered as a manager, IPERS does state several minimum requirements for firms submitting proposals. They are as follows:
- The firm managing the product (the Manager) must be registered with the relevant regulatory body wherever the firm is domiciled (e.g., SEC for US domiciled investment managers, FCA for UK domiciled investment managers, etc.).
- The product must have a minimum AUM of $400 million as of September 30, 2017.
- The product must have a proven and verifiable performance record that commences on or before January 2011, with returns that comply with the CFA Institute’s GIPS performance reporting standards, Compliance Rule 2-34 of the NFA Manual, or other well-known performance measurement standards. (Note: simulated or back–tested results for any portion of this period are not acceptable). The product inception date must be clearly stated within the proposal l Product track records must be uninterrupted.
- Products must be benchmarked against a well-known public market index. Firms submitting products that are benchmarked to cash, absolute return, etc., should only do so if that product can be ported over a well-known public market index consistent with IPERS’ policy betas (see Part 1.A.1 for further clarification).
- The firm must be willing to accept a performance-based fee arrangement. (The fee structure can have a management fee component as well.)
- Monthly gross-of-fee product composite returns (from product inception through September 30, 2017) must be submitted to the Wilshire Compass Portal on the Wilshire website prior to or concurrently with submission of the firm’s proposal.
The tenure of the contract is for six years with the option to renew. However, IPERS can choose to terminate the contract at its discretion within 30 days of written notice to the manager.
The incumbent manager is allowed to re-bid.
Proposal letters are due December 8 at 3:00 p.m. CT.