When getting started with investment, your first task is to establish your goals and your attitude to risk.
What are you investing for?
How long is your timeframe?
To what extent are you willing to trade investment risk for the possibility of greater financial return?
With these questions settled, your next task is to choose an investment manager. But what should you look for? And once you’ve made your choice, how can you review an existing manager on an ongoing basis?
The below criteria offer a checklist for the type of questions you might want to ask when assessing an investment manager.
If you have an existing relationship with the investment manager, did the portfolio produce the returns you expected or were they much worse (or better) than anticipated? If the returns were behind the agreed benchmark or goal, how did the portfolio fare relative to the peer group? Was the performance achieved by taking the appropriate (and agreed) level of risk? It is tempting to award the highest marks for achievement or ‘outperformance’, but performance must be measured with care and over a sensible timeframe.
Generating an agreed level of income from a portfolio is often a fundamental part of a manager’s role. If income was a requirement, how much income did the portfolio generate? Too much or too little, or the desired amount?
3. Implementation of policy
Are you happy that your manager is investing the portfolio in accordance with the agreed strategy? Is the investment policy still appropriate or does it need updating? Should you consider another investment approach to complement your existing strategy?
Is your manager part of a well-established organisation? Is the team stable?
5. Communication and administration
Do you get along with your investment manager? Are they efficient? Do you receive regular, clear reports and are they explained properly? Is the investment performance and process transparent or could your manager be concealing a poor investment?
While we are on the subject of transparency, what about the fees you are paying? Are they competitive and what is the true picture? Assessing the true cost of a portfolio can be confusing and historically there has been a lack of transparency across the industry. With legislation introduced by the European directive MiFID II, managers are now obliged to break down the total cost of investment management. This includes all charges that are added to the quoted annual management fee, such as broker commissions, administration, third-party fund fees and VAT. While these new reports should bring more clarity to the industry the new legislation is not definitive in acknowledging all the costs of investment. Your fund manager should be able to provide you with a summary of the total costs you have incurred or are likely to incur.
7. Corporate governance and stewardship
Are strong stewardship principles embedded in your fund manager’s investment philosophy and process? Does your manager engage regularly with company management and vote on your behalf? If they do, is there enough focus on how governance factors affect shareholder returns? If you have any ethical requirements, can your manager accurately meet them? Ask your manager for their voting record, ensure they are keeping up to date with industry practice and if you have ethical restrictions embedded in your investment policy, monitor and debate these issues regularly.
While putting effort into conducting this type of research may be time-consuming, it is well worth the effort if the result is long-term stability and a portfolio that is suitable for your investment goals. With the right investment manager, these questions will be debated regularly and the burden of assessment should feel less overwhelming.