Patrick Barker, Private Client Portfolio Manager at Cannon Asset Managers, looks at key factors to consider when selecting an investment manager
Dealing with other people’s money carries a fiduciary duty and responsibility. When making decisions regarding fund managers in whom to place your trust, it is important to assess them carefully and with due diligence
One of the first things to consider when selecting an asset manager is that they need to pass the “security test” in terms of regulatory compliance, business standing and administrative processes. Without these factors in place, the manager should not even get out of the starting blocks
Know who you are dealing with
From a regulatory point of view, you need to establish whether the business is registered with the Financial Services Board (FSB) and has the required licences to practice as an asset manager. Other questions that should be answered are whether the business is registered with CIPC, who the directors and shareholders are as well as its BEE rating. It would also be useful to know if the firm is in good standing with the various authorities (from CIPC to SARS), if it carries appropriate and adequate professional indemnity insurance or if its directors are under any regulatory or criminal investigation, or if they have been in the last 5 years
Administrative excellence and record keeping is another must-have for asset managers. Some outsource this and some undertake it in-house. Either way, satisfy yourself that the administration is being effectively executed and that there is a continuity plan in place in terms of disaster management and data recovery. Reporting examples can be useful in assessing their standards.
These are just the basic necessities. Once you are content that an asset manager is a legitimate and credible practitioner, you need to assess their competency in the investment arena. There are generally four aspects to consider: the four “Ps” or people, philosophy, process and performance. Too often decisions are made based solely on the last of these – performance – but it is a mistake to look so narrowly at a fund manager. Performance will tend to move in cycles, and selecting a manager based on good past performance is certainly no guarantee that the future will be as rosy.
Take a comprehensive view
Rather base a decision on all four factors. Firstly, the people involved: are they qualified and do they have the necessary experience? Is there key man risk? How are they incentivised? This is important as it will determine whether your assets are managed with your best interests in mind or their best interests in mind.
Secondly, consider the investment philosophy or style practised by the manager.What are the attributes they look for when making an investment? Can they clearly explain what they want to own in their portfolios? And when the going gets tough, do they stick to their philosophy or do they chop and change
Thirdly, examine the investment process followed by the asset manager. Is this something that is repeatable? Does it lead to effective implementation of investment decisions? Is the process able to be audited, so if something goes wrong in their decision making they would be able to establish what went wrong?
And only lastly should performance be taken into account. ASISA requires that all advertised unit trust performance figures carry the disclaimer that “The value of units may go down as well as up and past performance is not necessarily a guide to the future.” And with good reason. There is little relationship between past and future performance. It is far more important to probe whether the performance “looked” like it should have. In other words, did the manager stay true to their philosophy? In a time when growth stocks are running, one would expect a value manager to show poor comparative performance. Over time, does the manager beat their benchmarks
Does the manager walk the talk?
In concluding your assessment, you need to find out whether the individual fund manager invests in his or her funds or portfolios. You might find that boutique asset managers are owner managed and those managers will possibly have a fair shareholding in the asset management business. This should be very encouraging to a potential investor and will carry greater weight knowing that aside from their shareholding, they also have their personal wealth invested in the same funds or portfolios their investors are in. For the larger asset managers the same can apply although they are generally not owner managed.
These factors are about the quality of the firm with which you invest. If you choose a manager carefully and wisely, you minimise the chance of unpleasant surprises. And we all know that no-one likes unpleasant surprises.