Choosing a discretionary portfolio investment manager is not easy. Clearly it is not enough to get on with the relationship manager and have them take you to Wimbledon.
But out of such a huge universe of potential managers, where should one start?
The first step is to decide what you want from your portfolio. Are you happy for the value to stay the same? Or do you want it to rise at least in line with inflation? If you are looking for greater returns you also need to consider how much you are willing to lose. And over what time horizon. If you are going to need the cash to buy one of your kids a house next year, then putting the money anywhere near the stock markets is inadvisable.
Understanding your risk appetite is the most important part of the process. With this in mind you can then home in on which managers deliver the best performance for your risk level. Investment objectives need to be put together, kept up to date and clearly communicated to the investment manager. For an investment process to be successful, managers need to be clear about investment objectives, and investors need to have realistic expectations.
It is important to choose investment managers with a proven pedigree for the required strategy. Face to face meetings need to take place with prospective managers to gather qualitative information and this should be backed up with quantitative data. It is crucial to evaluate both tangible and intangible factors.
Investment managers should be sensible but passionate characters who are focussed on excellence. Having said that, it is important for managers to know the limits of their capabilities and to have a strong sell discipline. A strong supporting team is critical to minimise key man risk.
One needs to look at the structure of a firm. Generally managers with personal stakes in a business are the most committed to achieving positive outcomes for clients. It is important that individual workloads in the team are not too high and that responsibilities are sensibly shared amongst the team, including idea generation.
The portfolio size is also significant as different managers offer better value and performance for different investable amounts. If your friend is investing $500m but you are only investing $50m, the types of investment appropriate to you are usually different.
Currency denomination is also important and very difficult to decide in an age when we are so international in our outlook. A custodian with an excellent credit rating is imperative – the events of 2008 have taught us that banks can fail, and it is fairly irrelevant how good the performance is on paper if the assets themselves are not secure. Similarly, the holding structure is critical and wealthy families often find a carefully designed offshore trust and company structure provides optimal efficiency and privacy.
Compliance, operations and trading structure need to be reviewed. Potential conflicts of interest should be looked for as well as a respect for the regulatory environment. For example, a trading relationship between an asset management firm and its brokerage parent is a potential area of concern. An independent and high quality auditor is crucial and independent custodians are generally preferable.
Once investment managers have been chosen and put in place, an appropriate accounting system is needed to consolidate (assuming more than one manager) and check the portfolio valuations received. Performance and asset allocation need to be monitored regularly to make sure patterns match the philosophy and mandate that have been discussed.