Guideline 29. Selection process for external fund managers

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Best practice is followed when selecting external fund managers.

This guideline outlines the administrative processes to select external fund managers. Guideline 30 outlines the investment issues relevant for the selection of external fund managers.

Guideline code

INVEST_03500

Mechanism

The board, management or investment committee should establish minimum suitability standards and a code of ethics for external fund managers.
The board, management or investment committee may also define the grounds for determining the liability of and mismanagement by the external fund managers.
Targets, standards and benchmarks should be established to evaluate the performance of each external fund manager, noting that the performance evaluation period should take into consideration an appropriate time horizon for measurement, given the nature of the assets invested in.
Where the board, management or investment committee lacks sufficient resource, expertise or governance budget to make fully informed decisions about external manager selection, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions.
Contracts for the provision of external assistance in each area where assistance is sought should normally be open to competition. A detailed selection procedure should be set out and agreed before the process starts.
External advisers should be appointed according to the quality of their expertise and not solely on the basis of the lowest tender. The exact criteria on which advisers are selected will be set out in a “selection procedure” document which will also cover how the trade-off between different conflicting criteria is to be determined.
The board, management or investment committee must ensure that they either possess internally or have recruited externally sufficient knowledge to define their requirements, understand the implications of the proposals presented to them, and evaluate those proposals within the framework of the social security institution’s mission and goals. External advisers who assist in the drafting and evaluation of proposals for third party assistance should not have a material interest in the outcome of the decisions taken.

Parent

D. Processes Specific to Internal and External Investment Management

Structure

To enhance accountability, transparency and predictability, there should be a written process, established in the by-laws of the investing institution, to select its external fund manager(s) and to establish the types of mandates given to them.
The board should direct the management to document and implement the policies, criteria and requirements to support the mandated process.
The internal audit office may be part of the checks and safeguards to ensure compliance with the process.
The board may direct the management to create an entity dedicated to the selection and ongoing monitoring of external fund managers.

Guideline 29. Selection process for external fund managers

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