How do You Identify a Good Investment Manager?
It is difficult to find reputable and quality Investment Managers. There are thousands of Global Fund Managers, Hedge Fund Managers, Banks, Private Banks, Insurance Companies, Pension Funds and Private Equities to choose from. Every Wealth Management team has a dedicated Investment Advisor or Specialist and everything institution has a Chief Investment Officer and Investment Committee.
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For Wealth Managers and Financial Advisors, putting together a comprehensive portfolio plan for client is an arduous task.
The most exciting though excruciating component is the investment allocation. So how do you identify a good Investment Manager among the hundreds of choices, with infinite amount of available data, information and analysis?
No. 1 The Macro Factors of Investment Managers
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Does the Investment Manager have a good grasp of the global financial market and economic development? Is their focus on increasing Assets under Management (AUM) or on identifying trends, pricing, demand & supply? Are they leaders or followers of investment trends? Do make they decisions on a consensus basis or individual basis? What is the risk to such structure and what is their obligation?
Do you know how they manage risks, crisis and wrong calls? What is their investment philosophy? What if global financial market risks had increased and they need to keep a larger amount of cash, but are constrained by the Investment Mandate – a common feature in Fund Management Regulation.
For eexample, a bond fund cannot be invested in equities or there might be a maximum cash holdings of 10%.
Knowing these macro factors help you to identify quality Fund Managers, especially during imminent crisis. Do you rely on them or do you follow their call? Would they help you to liquidate halve the portfolio and allocate into cash?
- Since everyday has good investment opportunities, you can always sell and get back into the market another time
- Since long market (buying prices to go up) always have liquidity issue, instead of attempting 5% gains yearly, wouldn’t it be better to buy at 30% discount during liquidity crisis?
- Do Fund Managers reduce their fees during negative performances?
Macro Factors in Summary
- Good grasp of economic development
- Good understanding of global financial market
- Price, Demand & Supply
- Focus on guessing trends
- Follower or Leader
- Ability to Manage Risks
- Ability to Handle Crisis & Wrong Calls
- Investment Philosophy
No. 2 The Micro Factors of Investment Managers
Does your Investment Manager have good reporting standards? Are the valuations accurate or subject to varied accounting practices? Do they use layered reporting such as Excel Sheets, Macros? Do they provide easy access to investment information?
Having too much information sometimes clouds your work while having too little information makes it hard for you to monitor and make decisions on the investments. Does your Investment Manager gives you different options?
Are they good in conducting due diligence? Are they good in executing the investments? Are there multi-layer of fees? Are the fees enough to compensate for the infrastructure and performances or are the fees to reward business growth? Does the expertise of the Investment Manager come from the Person or the System and Processes, or both?
Knowing these micro factors give you good insights of how your Investment Managers do their work.
Micro Factors in Summary
- Reporting Standards
- Due Diligence
- Distribution Fees
- System or Person
No. 3 Others
While both macro and micro factors are important, the person managing the investment is perhaps more important. Scams and frauds are common. Regulated investments and processes are designed to protect consumers and investors from these financial risks.
- Bernie Madoff: Scamming of America – The $50 Billion Ponzi Scheme
- Nick Leeson bankrupt Barings Bank
- 20 Traders Who Lost More than a Billion
Other than their expertise of investments, trust and credibility are essential before you would allocate money to the Investment Manager.
Whereas conflict of interests may occur, it is important to know the Investment Manager is not in the business of helping people to get rich, but a custodian of the money to take advantage of their superior knowledge in financial market, investment trends and managing the money.
A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting
~ Warren Buffett
If your Investment Manager is more interested to share their investment knowledge, gaining profiles and certifications, proving their investment calls is superior, you may either be working with an Investment Superstar or one that will sooner or later be proven wrong.
When that happens, it isn’t about the wrongs, it is the impact on the investment – what is the financial loss? That is maybe the most difficult part of your job – to answer to your clients.
Other Factors in Review
- Common Sense
So, would a good Investment Manager be within your grasp? If such a good Investment Manager is with you, should he or she not already be a Fund Manager?
If most Fund mangers are good, shouldn’t most Fund Managers be performing well above benchmark?