When considering investment managers, many feel that one will suffice. A false assumption, yet combining managers can be tricky, and many managers oppose competition with others. Nevertheless, having two managers with identical objectives but differing investment approaches makes sense, particularly to avoid placing all your eggs in one basket. Do not be deterred by doubling fees, as half the mandate equals half the fees paid, and a strong performance is worth additional costs. Economies of scale are rare, and managers are unlikely to discount fees for a whole mandate. Often, tactful negotiations can push fees down or assist the switch to a performance-related remuneration where appropriate.
Avoid the trap of giving several managers identical mandates; industry-standard benchmarks tend to dictate their actions, thus we argue their differences are minimal and risks remain. Concentration risks still apply, and duplicating does nothing to reduce personal risk. Here managers handle the same mandate through variations on a theme, so choosing one because it is large and one because it is small makes little to no sense.
Finally, maintaining portfolios requires regular and thorough communication. Question managers’ preferred reporting style, and clarify the expectation that your client’s wealth will be managed in a controlled manner. Ask for performance attribution; ascertain what decisions work well for the manager and which do not. Compare the data to industry standards, including any fees in the return numbers so that like-for-like comparisons can be made. Furthermore, scrutinising certain investment ratios can demonstrate where managers are making gains over and above trackers funds, which managers should be able to demonstrate.
This is not an exhaustive process, and there are many nuisances in vetting, selecting, and monitoring investment managers. Big names do not equate to big numbers, and there are numerous investment managers in the marketplace vying for attention. Beauty parades are not intrinsically flawed, but it is easy to see the process as a bulletproof one, although if managed incorrectly, it is not. The beauty parade should be the finale to significant investment research, not a fund manager pageant. Detailed research will pay dividends in the future, so ensure your shortlist is not decided by a good lunch.
Adam Benskin is a director of Strabens Hall
| Key Points |
For most new to investing, the paradox of choice and the financial jargon are more than daunting. Investors are increasingly influenced when faced with a positive and enthusiastic panel. When considering investment managers, many feel that one will suffice – a false assumption. |
