Step 5: Selecting Leading Fund Managers
Once it has been decided how much to invest in each of the asset classes, locally and internationally, the question then becomes one of determining how to select the particular investments in each of these areas. Here you have the option of investing directly, that is, investing in cash, fixed interest, property and share markets yourselves and/or in conjunction with an adviser. It is difficult for most investors, even those with several million dollars to invest, to achieve a truly diversified portfolio through direct investment. Furthermore,most individuals have neither the time, skill nor access to information to manage a well diversified spread of investments.
Given the need to manage risk through disciplined diversification across the different investment classes locally and internationally, the Money Matters' view is that managed investments offer a superior option to direct investment. Managed investments are a medium for indirect investment. They involve individual investors pooling their investments with other investors to obtain the benefits of a professionally managed fund. These benefits include:
Fund managers are experienced and qualified professionals who specialize in the selection and maintenance of investments. The managers maintain extensive contacts and have access to detailed information, which together with in-house expertise, allow them to make informed decisions on behalf of investors. Fund managers are in constant touch with the markets they invest in.
Investors with limited capital can invest in multi-million dollar investments that most would not have the financial capacity to otherwise make. These larger investments often represent assets of superior quality purchased in strategic parcels that offer far greater returns than those available from smaller sums invested.
Spread of Risk
Investors obtain a much wider spread of risk than most could otherwise achieve. Investors buy into a wide portfolio of investments, which spreads the risk and reduces the possibility of price fluctuations.
This brings us to our fifth step, in which we select your fund managers. There is no one fund manager that suits all types of investors in all market conditions. There are two main reasons for this. Firstly, investors’ needs vary greatly, especially with respect to their ability to tolerate risk. Secondly, the size of worldwide equity, fixed interest and property markets make it impossible for any one manager to be best in all markets and under all conditions.
So how does Money Matters go about the task of selecting leading fund managers? I previously managed the research firm IPAC(NZ), now NZX owned FundSource. IPAC created a framework for rating fund managers known as the four Ps - People, Process, Portfolio and Performance.
At its simplest, funds management involves people buying and selling investments. Therefore, the calibre of staff making those decisions is critical. Strong leadership is required to direct a funds management team to achieve its goals. This relates both to the performance of investment portfolios and the strategy outlined for the business itself.
Experience really does count in the investment industry. Markets are complicated and extensive and a vast and detailed knowledge is invaluable. Because of this, continuity of staff and retention of top performers contributes greatly to an organization's consistency. Loss of staff is expensive, since new people have to be acquired and trained. Finally, the organization as a whole must have adequate resources, not only in terms of funds management staff but also client servicing, marketing and administration.
Having top people and sufficient resources is only part of the formula – they need to be coordinated into an efficient, decision-making unit. There needs to be an effective structure within the investment team, and discretion given to members needs to be appropriate to the style of funds management. Some portfolio managers are vested with wide investment powers, while others are very structured and controlled. Each type of culture has its merits, but again consistency is the key.
A fund manager must be able to articulate a coherent philosophy – in other words, the principles used to guide those buy and sell decisions. This will determine the overall risk level of products offered. A fund's asset allocation and selection would be expected to reflect the stated objective and parameters set by the manager throughout all market cycles. For example, a more conservative equities portfolio might be expected to have a lower stock turnover, a steadier allocation to cash, and less sector and stock specific risk than a more aggressive portfolio.
Why put performance last? Past performance is only part of the picture. If any of the other three Ps have changed, future performance is likely to be affected by those changes. Therefore, past performance is best considered once the organization as a whole has been thoroughly examined.
Performance is measured from several angles. Achievement of the objectives set by the manager, in terms of both return and risk, is important. Further, superior comparative performance in relation to competitive products during different market conditions is also considered.
Adopting a process such as the Four Ps helps to select leading fund managers that match your objectives.