Choosing the right investment managers and knowing when to leave them

Strategic asset allocation drives returns, but poor manager selection can significantly erode gains. Mark Parry, Head of Manager Research at Barnett Waddingham, shares his insights on selecting the right manager and knowing when it's time to move on.

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Strategic allocation has the most significant impact on returns, but have you sat on the side of a poor manager selection experience and felt the impact of that on your returns? The chart below shows the range of returns we have seen over the last three years in public asset classes (as you can imagine, the ranges are wider still when you look at private managers). For a £1m investment in diversified growth, for example, the value to the investor of picking the best performing manager versus the worst is an astonishing £650,000 over just three years.

 

 

What do you assess in a manager?

What we are looking to answer for our clients is:

• How clear, transparent, explicable and repeatable is the investment process?
• Is the team and the organisation capable and stable?
• How is performance generated in terms of risk and return?
• What circumstances will the strategy deliver in and when might it struggle?
• Economic and market backdrops evolve and change, sometimes predictably, sometimes less so. How does the investment process manage these challenges?
• What about other factors such as sustainability and stewardship?

We use a combination of quantitative and qualitative assessments to answer these questions.

How do you get the answers to these questions?

We like asking questions, and carefully evaluating the answers, be it in our initial analysis or when meeting a manager.

Before we rate a strategy, we insist on meeting the key decision-makers, face-to-face, in their own offices whenever possible. You simply cannot assess whether a manager is able to repeatedly deliver, or understand how a fund will respond to different economic scenarios, from a desktop analysis. Such an approach might lead to a decision which is too heavily biased towards managers with recent good returns.

What do those meetings with investment managers look like?

They’re illuminating. We do not sit in silence taking minutes and nodding in wonder. We watch to see how they answer questions, rather than just what they say, and how they interact with each other. What is the dynamic in the room? Who’s really in charge?

We pride ourselves on our constructive and active interaction (something that managers are regularly surprised by). We don’t care about labels and job titles but we do need to understand exactly how a portfolio is designed and populated, and how the sustainability outcomes from the manager’s research process are applied. If they can’t earn our trust in that meeting, then they shouldn’t be trusted with your money.

Those that know BW will know that we don’t have buy lists, or imposed or prescribed products, which means that our clients get advice to meet their different needs. We work in partnership with clients to help you choose the right managers to meet your chosen investment strategy.

How important is it for investors to meet the manager?

That is quite personal, and will vary from investor to investor. You need to be able to trust that the manager can do what they say they will, and often meeting the managers is a helpful way to get a feel for that. But let’s be frank, there are good managers that can present badly and bad managers that can present well. Our job as the manager researchers is to pick through that and understand the quality of the process beyond the quality of the presentation.

"There are good managers that can present badly and bad managers that can present well."

 
How do they make and implement decisions? How has historic positioning been arrived at and how has it been changed? Is this consistent with the claimed principles and philosophy? Are the decision makers experienced and capable? How does the manager nurture new talent to support future growth? Do they have a robust framework to identify best ideas and how do they ensure they are implemented in a timely manner, and reviewed going forward?

We are here as the expert interpreters and we have the knowledge to help guide our clients. But for you to feel comfortable with the people you are trusting to meet your needs and objectives, and deliver the returns for you, I think having our expert opinion and then using that face-to-face with the fund managers is a really helpful approach.

What weighting should be given to historical performance?

Performance matters, but only if you consider how it’s achieved – for example, you can generate high returns with a lot of risk. You may not want that approach.

We all know that there is no investment return without taking risk. The point is understanding how those risks are taken and managed, and whether the returns are proportionate and reasonable in terms of the risk that's being taken. I would prefer the right level of return with a lower level of risk taken to achieve that, because that's efficient.

Does the time frame that it's delivered in work? Does the level of volatility work? How does that work with other assets that you might have? There's a raw number, and then there's the how is it being done? Is it being done well? And, critically, can they do it again?

So, historical performance matters. But, how they generate that return and how predictable that return is; that’s the important bit. 

Should we always go with the cheapest approach?

If your net return and the pattern and the volatility of those returns is meeting your objectives, then that's good. If we can find the same thing slightly cheaper, that's of course better, but fees shouldn't overwhelm the other factors.

For example, we've just had a meeting with a private asset provider who screen out certain investment products automatically if the fees are too high. This is fine, in principle, but you're forgoing potential opportunities that might be really what you need or that are useful for meeting your objectives.

For us, we would like the most efficient way of achieving a return. Fees are part of that, but too much of a focus on fees (or scale for that matter) could limit the investment universe and the strategies available, and ultimately hold you back. 

How do you balance maintaining established managers with finding new innovative managers?

The key here is the sustainability of the manager; the solidity of the team that you're entrusting to manage your money is important. You want the manager to still be here and doing a good job within the time frame of your investment horizon.

That doesn't mean that big managers can't shut down business lines either. We are genuinely agnostic as to the provider, whether they're big or small. You just want to know they are competent for the timeframe that matters to you.

We are always alert to new and innovative ideas such as the evolution of private markets and rise of strategies like natural capital. We are also mindful of the benefits of longer-standing asset classes, like listed equity and fixed income.

In all cases we look for performance and risk management credibility. We use systems to help us, both commercial and in house, to compile, monitor and filter our universe of funds and strategies but no strategy, long-standing or newly launched, will make it onto a longlist without a formal research rating covering both performance outcomes and sustainability.

What should investors consider when deciding whether to leave a manager?

There are red flags – such as unexpected underperformance or changes in manager ownership, philosophy, process or key personnel – but the key thing for investors to consider when reviewing a manager is what you need to get you where you need to be and whether the fund will get you there.

What you need from your investments can and will evolve over time. The population of your portfolio may no longer be the best fit to meet your goals. Market returns and opportunities may have shifted significantly. New or evolved strategies might be a better fit.

Performance might have been lacklustre – managers may not have delivered in line with expectations or reacted well to market events. Sometimes, however, performance can look disappointing, even when entirely in line with expectations for a fund of the type invested in.

Our understanding of how and why strategies and managers should perform allows perspective and judgment to look though immediate underperformance and help inform decision making. When the time comes, we are experienced in identifying replacement vehicles and how to complement existing holdings.

What key learnings has your 20+ years experience as a fund manager brought you?

"Never buy something you don't need to own. Never buy something you don't understand."

Never buy something you don't need to own. Never buy something you don't understand. And finally, there is no monopoly on good ideas – enable and encourage the generation of best ideas from everyone in the team and then make sure you implement them. 

How Barnett Waddingham can help

Our independent, objective approach ensures tailored advice free from conflicts of interest. We don’t run money in-house, so our sole focus is on finding the best strategies for your needs.

Get in touch to learn how our research can help you select and retain the right investment managers.