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Mercer (Service Provider)

Service Provider Reporting Framework 2017

You are in Advisory and Consultancy » Selection, appointment, and monitoring

Selection, appointment, and monitoring

AC 12. Manager selection activities

12.1. Indicate what activities you undertake during the process of selecting a manager.

          Custom strategy development (we have worked with clients and managers to support the development of customised mandates and new products, such as those relating to low-carbon indices).
          Stewardship reviews - policy compliance with the UK Stewardship Code and voting and engagement activity and disclosure.

12.2. Additional information. [OPTIONAL]

Mercer's clients require varying levels of support during the process of selecting an investment manager.

  • GIMD only - subscribers to our Global Investment Manager Database undertake their own selection process based on our research.
  • Moderate support - limited to drawing up short list, or another single part of the selection process.
  • Full service support - detailed guidance on portfolio construction, screening the database, long lists and short lists, site visits, finalist opinions, due diligence and contracting.

Some Mercer clients also elect to outsource the implementation of manager selection and monitoring via Delegated Solutions.

AC 13. ESG in manager selection, appointment and monitoring

13.1. Provide a brief description of how you consider ESG factors in your selection, appointment, and monitoring process.

          Mercer’s approach to ESG integration is referred to as our Framework for Sustainable Growth. It seeks to integrate ESG throughout the investment process, including manager selection and monitoring. 

Key to how Mercer ensures ESG factors are included in the selection and monitoring process is our proprietary RI manager research framework, which results in an ESG rating [ESG1 (the highest rated strategies) to ESG4 (the lowest)] and narrative utilising Mercer’s four-factor rating system (Idea Generation; Portfolio Construction; Implementation; Firm-Wide Commitment). 

Since 2010 Mercer's Manager Research team has assigned an explicit ESG rating as part of the standard manager research process by strategy globally across asset classes (in the two years prior the RI team conducted firm wide reviews). These ratings are available to all clients as part of standard manager selection and monitoring services. 

For a strategy to be assigned an ESG1 rating, the investment team must have demonstrated market-leading capabilities in integrating ESG and responsible ownership into the way they generate investment ideas, construct portfolios, implement responsible ownership practices (through voting and engagement), and the degree of firm-wide commitment to ESG issues. 

As at June 2016, Mercer had assigned an ESG rating to more than 5,500 strategies, and we will continue to pursue ESG integration as important for fund manager strategies, particularly as more asset owners build ESG into their selection and monitoring criteria.

Additional information on our ESG research and ratings can be found here:

AC 14. Research and up-to-date information in selection, appointment and monitoring

14.1. Describe your approach to research and how you collect the relevant data for the selection, appointment, and monitoring process.

          Research may initially begin with an introduction to the manager and the strategy. Research prioritisation may be based on the views of the researchers and client demand. All relevant firm wide and strategy level data is populated by the managers in Mercer’s Global Investment Manager Database (GIMD). This information aids in the initial research, selection, and monitoring process.  

The information collected through GIMD is used as support when meeting with the managers to discuss investment process, portfolio construction, implementation and business management.  Following the meeting with the managers, the researcher documents the strategy’s pros and cons through a four-factor framework report, and assigns both an ‘alpha’ rating to the strategy (A, B+ etc. that reflects our conviction in the future performance of the strategy vs benchmark and peers) and an ESG rating (ESG1-4) that reflects our understanding of the degree to which ESG factors are integrated within the investment process.  The ratings will typically be peer reviewed by another researcher, and discussed at the Rating Review Committee, which provides challenge and approval for the rating, leveraging the insights of the senior decision makers in the research group.

14.2. Describe how you ensure that you are using up-to-date information for the selection, appointment, and monitoring process.

          The Mercer manager research team encourages managers to ensure that investment strategy information is up to date in GIMD e.g. all firm wide and strategy specific information. Prior to conducting any meeting with a portfolio manager, our process includes a review of the database, which includes an assessment of latest available portfolio holdings and up to date performance. We will follow up with the managers with any additional requests for information required to assess and monitor the investment strategy. There is also a regular research review period required for all strategies where we have client exposure.

14.3. Additional information. [OPTIONAL]

AC 15. Incorporating asset owners’ investment principles in selection of manager

15.1. Describe how you incorporate asset owners' investment principles into the selection process.

          The first step in any manager selection exercise for clients is to screen Mercer's internal research system ("GIMD") for top-rated managers within the specified asset class and with the appropriate ESG rating - to ensure that client objectives and investment principles are appropriately captured. This can include setting minimum standards using Mercer's ESG ratings (e.g. some clients will not consider strategies with an ESG4 rating or will only seek ESG1 or ESG2 rated strategies or may seek bespoke mandates to be developed). This step may also involve the individual manager researcher with responsibility for researching the particular asset class.

If required by the client, Mercer will then prepare a long list of the available managers and investment strategies, including a brief profile for each. Mercer then works with the client to produce a shortlist of managers to be included in a comprehensive manager selection process - including a report and subsequent "beauty parade" - after which a manager or managers will be selected by the client. We also have access to ESG data which we can use at the portfolio level to review additional characteristics of importance to clients (e.g. exposure to certain sectors, or carbon footprint analysis).

AC 16. ESG in selection due diligence

16.1. Indicate whether you include ESG factors in your due diligence process for manager selection.

16.2. Describe how you weight ESG in your manager evaluation.

          Our response to AC 13 provides an overview of Mercer's ESG research and ratings process. Weighting ESG in manager evaluations can be influenced by asset class, where there are differentiated questions and considerations. In the case of Mercer's ESGp ratings for passive equity strategies, there are weighting differences within asset class, with a greater weighting to active ownership in those reviews.  

We also note in AC 15 that some clients set minimum standards in the ESG ratings e.g. not considering ESG4 strategies or only considering ESG1 or ESG2 strategies, and the weighting to ESG in manager evaluations will be higher for those clients. There are also clients that are seeking bespoke mandates that may require ESG or new opportunities in sustainability themes to be an important criteria in evaluating managers to implement a new mandate.

AC 17. Monitoring investment managers on ESG

17.1. Indicate whether you monitor investment managers on ESG factors.

17.2. If yes, describe how you monitor investment managers on ESG factors.

          Our response to AC 13 provides an overview of Mercer's ESG research and ratings process. The ESG ratings are assigned alongside a separate investment rating for the vast majority of all strategies that are actively covered by the research team (e.g. cash is not covered). The review process depends on the investment rating, at which time the ESG ratings are also reviewed. Strategies that are A rated will typically be reviewed by the research team every 12 months; B+ rated strategies will be every 18 months; and B rated strategies every 24 months, as a guide.

17.3. Describe how you raise and manage concerns when monitoring investment managers on ESG factors.

          Mercer has continual dialogue with a wide range of managers, globally, as part of our manager research and monitoring activities. Any specific ESG concerns that arise are typically addressed by following up with the managers. If specific concerns related to ESG are identified during manager monitoring conducted on behalf of clients, we will raise these directly with individual managers. Mercer may act on behalf of a number of clients in this process.

AC 18. Reporting back to asset owners

18.1. Indicate whether you report back to asset owners on your manager selection, appointment and monitoring activities.

18.2. If yes, describe how you report back and the frequency.

          All manager selection and monitoring work is conducted on behalf of our clients. As a result, all relevant information is provided to clients as frequently as is necessary. For example, during a specific manager search process Mercer will be in regular contact throughout. For monitoring of appointed managers, quarterly updates are common, but frequency will vary by client. Ad-hoc updates on individual managers are provided as required (e.g. to update clients on significant personnel changes).

See response to AC17.2 – strategies will typically be rated between 12-24 months depending on their investment rating (at which time the ESG rating is also updated). These updated reports are typically sent to the client and any more frequent monitoring activities will also be reported to clients. Any unexpected news that comes up related to a specific strategy is conveyed to the client via a News Item with any follow up contact with the manager, as required.

18.4. Indicate whether consultants in your organisation receive compensation linked to manager performance on ESG/RI factors

          Consultants do not receive remuneration based on the performance of investment managers on any factors.

AC 19. Demonstrating value on manager selection, appointment and monitoring

19.1. Describe how you measure, track or otherwise demonstrate your value on manager selection, appointment, and monitoring services.

          Mercer conducts regular analysis of our own investment research performance, using our own comprehensive dataset, to illustrate to our clients the value we add. Mercer’s “Measurement of Value Added Through Mercer’s Manager Research Recommendations” analysis illustrates Mercer’s ability, across a wide range of asset classes, to identify investment products that outperform their relevant benchmarks.

19.2. Additional information. [OPTIONAL]