Managing your investment managerPublished on 20 Jan 2021
Guidelines for a family - Layve Rabinowitz
When investors employ the services of an investment manager, it can be difficult to make an objective decision on who to choose and how best to monitor performance. An old adage in the investment world is that, if an investment manager is doing well, it is due to their skill, but if they’re not, it is simply down to timing… How do investors then know what to believe?
It can be helpful to call in the advice of a Family Office that, in its role as a client’s key advisor and right hand person, also provides counsel and oversight on investment management. Experience has revealed seven guidelines that should be followed when choosing and managing one or multiple investment managers.
#1: Be deliberate on your timeframe for evaluation
Decide upfront at what point you are going to evaluate your investment manager. Whether you opt for an annual review or a medium to longer-term timeframe to give them a better chance to perform, be sure to fix a specific duration for accountability purposes. Although we agree with the adage ‘invest for the long-term’, a vague timeline should not be used to cover up poor performance.
#2: Understand and communicate your risk profile
How much risk are you willing to take for the return? How well will you sleep at night if your paper losses are significant? Understanding your own risk profile and discussing it with your investment manager is more than just a conversation about being a cautious, balanced or growth investor. An in-depth dialogue that considers real scenarios as well as your personal response to varying levels of drawdown risk, will help you make informed choices.
#3: Don’t compare apples with oranges
In the selection process, there is often a temptation to make it a two-horse race and compare one investment house with another. Yet each will give you their own reason for why they are up or down at any given time. Do an initial check to see if their mandates are the same. If they’re not, be clear on how you have chosen to monitor each one before drawing judgement. Use of a benchmark may make a better comparison than comparing two investment managers with differing styles and mandates.
#4: It’s not all about the fees
While it’s key to pay close attention to fees, they should not be the driver of every decision. What’s more important is for a manager to be transparent about pricing and disclose all fees upfront. Request a TER (total expense ratio), as there are often fees hidden through layering. Common fees cover investment management, asset management, custody and performance.
#5 Watch out for oversize allocations to in-house products
Is it possible for one investment management house to employ the best managers in every region globally and every sector? No! Therefore be careful of investment managers who allocate most or all of the portfolio to house brand funds and managers. This is another way of layering fees.
#6 don’t buy into performance alone
On any investment report you’ll find the statement that past performance is not an indicator of future performance. Yet many investors use past performance as the sole driver in their selection process. Experience tells us that for long-term investing, buying into the philosophy of an investment manager is equally if not more important than focusing on performance, as it will give you greater understanding of and confidence in the investment decisions made by your manager.
#7: Look for a lack of conviction
It’s important to understand that adding every latest trend share in nominal percentages to your portfolio in reality won’t make a difference either way if the share performs. Often referred to as index mimicking, a manager might do this as a way of covering themselves against any questioning on stock selection. A lack of resolve further supports the importance of buying into an investment philosophy, as there should be neither the need to second-guess investment decisions, nor any reason for your manager to deviate from an investment strategy to satisfy a whim.
Layve Rabinowitz is Head of Family Office Middle East and Africa. Layve also serves as an adviser to a number of ultra high net worth South African families.
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