There are four factors to consider when you are selecting an investment manager, namely: Philosophy, process, people and performance. Investors often focus on performance to differentiate between prospective investment managers. An investment manager’s past performance, while an important factor to consider during your selection process, does not always guarantee success in the future. Using the right people to implement a consistent process and philosophy will allow you to increase your chances of replicating past performance into the future.
How investment managers think about investments is known as their investment philosophy, it’s essentially their personal insight into investment. This is the blueprint, which defines the way an investment manager invests. Understanding your investment manager’s philosophy will give you a better insight into their investment decisions.
But an investment philosophy is only as good as its application. Assess the behavior of an investment manager relative to their philosophy over the long term, preferably through a number of market cycles. This allows you to judge the merit of the manager’s investment philosophy.
The investment manager’s process describes how they implement their philosophy into a client’s portfolio. The process should be flexible enough to take advantage of market conditions, while being rigid enough to effectively implement the investment philosophy. Consistency in the process is an important indicator whether an investment manager’s past performance is repeatable.
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The successful implementation of an investment philosophy and process depends on having the right people with the necessary experience. Make sure you ask for recommendations and references before choosing an investment manager. Then follow up and call the references to get their thoughts.
Ask how long they’ve been with the manager and if they know what their portfolio performance has been during that period.
Performance represents the outcome of the other factors. Evaluation of performance requires a long enough timeframe in order to assess whether the implementation of the other factors has delivered over time.
Understand the details of the portfolio
An investment manager is essentially the custodian of a client’s investment and savings. They are governed by each portfolio’s mandate, which covers a wide variety of issues like return objectives, performance benchmarks, liquidity requirements, and various fees.
They also define specific parameters with which the manager must comply. For example, an equity-only fund is restricted to investing only in equities, even if the investment manager believes that equities are too expensive. It is thus vital for you to understand the details of the portfolio you select to ensure that they are aligned to your investment objectives.