It is challenging for investors and their
advisers to differentiate between investment managers in an ever-changing
landscape. When assessing who is best placed to manage your investments it pays
off to gather as much information as possible upfront and to ensure that the
evidence is relevant to future outcomes, not past returns. Ultimately,
selecting the right investment manager is more of a consistency contest than a
talent or intellectual evaluation. A good acid test is to ask: will the asset
manager likely be doing the same thing in 10 years’ time? By answering this,
you need to look at the incentives, the business structure, the team stability,
experience, breadth and evidence of past investment conviction and temperament.
These types of questions avoid the natural inclination of anchoring on past
performance when it is the future that matters.
An extension of this thinking is to avoid
focusing on funds: rather see a fund as an underlying business, team and process.
So, what evidence is at your disposal and what should you be looking
for?
There are generally two types of information.
First is the external message: you can source the information that the
investment manager presents to the outside world. This is fairly straight
forward and is usually available on their website and via newsletters. Second,
and more complicated, is to source evidence that evaluates whether or not the
manager actually does what it says. There are a few ways you can assess this,
for example, you can evaluate their investment holding period and portfolio
turnover by assessing the frequency with which their portfolios or top 10
holdings rotate. Are they long-term investors or do they respond to short-term
events? You can also see if the top 10 holdings align with those in the index,
which may give you further insight into their investment style. In addition,
you can look at team changes: stable teams often result in more investment
consistency. Websites reflect core people – you can track them and gauge their
experience: how long have they been managing this mandate and do they have the
requisite experience?
Key criteria
These are a few high level ideas. But complete
research involves examining the business and the team and, if done properly,
will take time and involve several rounds of information gathering. While it is
not recommended to adopt a ‘tick-box’ approach, there are some key criteria
which, if fulfilled, can bring you comfort that an investment manager will most
likely deliver on its obligations:
1. A business and shareholder that understands
asset management. Look into the intent behind the shareholders. Are they likely
to overload their investment team with too many offerings? Will they grow
assets beyond what is digestible for active management to thrive? How do they
measure themselves? And do they support their portfolio managers during periods
of underperformance?
2. One or two individuals who drive the
investment process and who love investing (and who are, therefore, often averse
to marketing).
3. A team that has significant experience with
the specific asset class and has sufficient depth in resources. There is, at
times, an odd anomaly with South African asset managers who seem to have far
more people allocated to SA investments than global, yet there is materially
more work to do in global. Always ask: is the ratio of people to investment
ideas appropriate, given the mandate? More often than not, an analyst cannot
adequately research more than 15 investment ideas.
4. A low staff turnover environment of senior
investment people. Can you trust the track record if the team changes
frequently? Also look at the calibre of people who are joining; peer
endorsement is a good sign.
5. A clear investment process that is deeply
engrained into all corners of the team. It needs to outlive any individual and
make intuitive sense.
6. They do what they say they do. It is
important to look inside portfolios to see whether past actions are consistent
with what is written on the tin. Different people in the same business should
be giving the same message.
7. Appropriate incentives: do they align with
the client’s promise? Are fees appropriate? Are they invested alongside the
client? It is usually a red flag when an investment business sees financial
rewards as the key determinant of behaviour and culture.
In the end, the selection of an appropriate
investment manager is always going to be a judgment. There is no perfect
answer. But we think that if you look for consistency (and the drivers of consistency)
above all else, you will likely select a manager who delivers on their
obligations.
If you lack the time and/or appetite to
perform your own due diligence and make your own assessment, you may want to
make use of the services of an independent financial adviser. Independent
advisers do regular research and can assist you in putting together a portfolio
based on your needs and your risk appetite.
Source：Allan Gray GrayIssue
