The ever-changing financial landscape makes it a challenge for investors and their advisors to differentiate between investment managers and companies. It is highly advisable to gather as much information as possible when assessing prospective investment managers. You should ensure the data you have is relevant to future outcomes and not past returns since the selection process is really more of a test of consistency and not talent. Ask yourself: “Will this asset manager still be yielding the same results in 10 years time?” This means you have to evaluate an investment manager’s incentives, business structure, team stability, breadth, experience and temperament. This allows you to focus on future performance without anchoring yourself to past performance. We can extend our thinking even further by viewing a fund as an underlying business with a team and a process.
What information should you look for?
The required information can be categorized into two columns: The first is the information a manager releases to the world. Obtaining this data is quite easy and is usually available on request, via the website or a newsletter. The second requires you to find data to evaluate whether the manager actually delivered what was promised. Accessing this information can be done a few ways: Evaluate their portfolio turnover and investment holding period by looking at the frequency with which their top 10 holdings or portfolios rotate. Are they responsive to short-term events or are they long-term investors? Check if the top 10 holdings align with the index. This gives you some insight into their investment style. Look at team changes since stable teams generally translate into investment consistency. The core team information is often available in the website, which allows you to track them in order to gauge their experience.
What are the key criteria?
A proper evaluation involves examining all the data and the team, which usually takes a number of rounds to complete. There are, however, a few “big picture” key criteria to help you with the initial evaluation of a prospective investment manager.
- Shareholders and a business that understands asset management. What is the intent of the shareholders? Do they overload the investment team with many offerings? How do they measure themselves and are they supportive of portfolio managers when they underperform?
- Consists of one or two people who love investing and drive the entire process. These people are often averse to marketing.
- The team has the proper resources and has significant experience with specific asset classes. Specifically, is the ration of investment ideas to people appropriate? A single analyst cannot properly research more than 15 ideas.
- A team with low staff turnover. How can you trust a team’s record if the team is always different? If new people do join, then what is their experience and do they have any peer endorsements?
- A clear and intuitive investment process that is the cornerstone of the team.
- They follow through on their promises. Look at their portfolio to assess whether past actions are consistent with the information they provide you.
- Are the incentives appropriate? Are the fees appropriate? Are they invested along with the client? A typical red flag is an investment company, which views financial rewards as the key determinant of culture and behavior.
Ultimately, selecting an investment manager is always going to be a judgment call. While there is no perfect solution, we can still evaluate them according to their consistency. A consistent manager is more likely to deliver on their promises.
Due diligence can take some time so if you find yourself a bit overwhelmed then consider consulting a good independent financial manager who can help you formulate a plan and portfolio according to your risk appetite.