Management risk

Separate accounts have much appeal to investors, but they also mean more eggs in fewer baskets.

The arguments in support of separately managed accounts are obvious. Limited partners benefit from favourable fee structures, more control over their portfolio’s composition and greater distribution of risk across asset classes, as many accounts allow the manager to invest in different strategies and platforms. 

With that in mind, it’s no surprise that a growing number of US public pensions have opted to allocate capital to large, opportunistic accounts managed by their most trusted firms and advisors. Lower fees imply better alignment of interest, and the ability to turn down deals offered up by management teams enables LPs to better manage risk.

Both were selling points for investment staff at the San Bernardino County Employees’ Retirement Association, which strongly recommended the approval of separately managed credit accounts proposed by Oaktree Capital Management and Ares Management at its board meeting earlier this week, according to documents disclosed to Private Debt Investor.  Another selling point: these mandates would allow Ares and Oaktree to invest across the “full breadth” of their business segments, which are wide ranging and substantial, to say the least.

But while diversification across asset class and geography is critical to portfolio management, so too is diversification of manager. Placing significant bets on a small handful of investment teams requires trust that those teams will remain viable partners for the long-term. Even if separate accounts encourage diversification across the entirety of a firm’s investment platform, LPs are still assuming the risk of putting more eggs in fewer baskets, if you’ll pardon the cliché. 

Oaktree, Ares and other firms have already established themselves as capable managers of separately managed accounts across a variety of mandates. Even so, asset managers that diversify their strategic focus and holdings aren’t immune to disaster, as our most recent Capital Talk subject Fred Eckert can attest.

On its separate accounts page, portfolio management firm Osterweis Capital Management writes: “There is a risk that we do not manage the asset allocation strategy successfully”. 

It’s an obvious risk, but as more and more LPs pursue larger separately managed accounts, maybe it’s not obvious enough.

A quick addendum – Several members of the PEI staff, including the editor of this publication, will be participating in the Royal Parks Half Marathon in London this week. The run is part of our ongoing effort to raise £15,000 for Shelter, the UK’s largest housing advice charity. A benefactor has promised to match every pound we raise past our initial £10k target. As such, we strongly encourage you to donate at www.justgiving.com/PEIMedia