Is it time to break up with your fund manager?
By now you probably know that your duty to look after your investments does not end after the initial due diligence of selecting an investment manager. Manager selection is a crucial first step, but that is really only the beginning. You must establish a process to prudently monitor your investments with quantifiable criteria that will systematically generate a review of underperforming investments. Common reasons to replace an investment might include the investment manager retiring, the investment taking excessive risk, or the investment’s performance lagging the benchmark. However, sometimes after a thorough review of your investment it could make sense to retain it instead of replacing it. Let’s look at some of the reasons to not break up with or fire your investment manager.
One of the most critical data points for an investment fund is the portfolio manager. However, not all portfolio managers are created equal. On any investment you own, you will want to know who is actually making the final buy/sell decisions for the investment. Investment companies frequently list two, three, four or more portfolio managers on an investment, but generally only one of them is considered the “lead” portfolio manager. Beyond that lead portfolio manager, the investment firm may choose to list their Chief Investment Officer (CIO) on some or all of their funds. The CIO can be a very important person at the firm by setting macro-economic policy, but they do not normally have a huge influence over any specific investment. Also, you will frequently see the name of a member of the research team named as a co-portfolio manager. Investment firms can reward high performing analysts by giving them the portfolio manager title, but generally we find that their primary duties remain unchanged. It is also possible that the investment is managed in a true team format where all co-managers must agree to add or subtract something from the portfolio. Other teams are set up with a sleeve approach where each of the named portfolio managers independently runs a “sleeve” of the fund. This sleeve might be 5-10% or it might be 50% or more.
When a manager changes on your investment, we believe you should not give the new manager the benefit of the doubt. However, who is changing really matters. If it is the lead manager who is retiring, you would almost certainly want to replace the fund. But what if it is one of those “manager in name only” managers that is changing. It may be that the individual responsible for the investments historical outperformance is still with the investment and it should be retained.
It is not uncommon to come across managers that are underperforming their benchmark. This is always a cause for concern and should be an automatic trigger to dig deeper into the investment. However, just like with a manager change, underperformance is not always a good reason to replace an investment manager. A manager’s performance must always be viewed through the prism of the market environment they were working in. Different strategies will hold up better or worse relative to what was going on in the market at the time. Perhaps the market has just experienced a period, where growth stocks dramatically outperformed value stocks. In that environment, the more growth stocks a manager owned; the better he did. However, if your large value manager underperformed because he refused to “cheat” by venturing into growth stocks, that would be viewed positive. Sometimes style purity will hurt your manager when their style is out of favor. Other times your managers may lag their benchmark, because they do not hold any foreign stocks; or because they refused to dip into smaller stocks. If your manager has expertise in a certain area of the market (ie. Large Value), and that is why the manager was hired, you don’t want the manager moving out of his/her specialty just because it is not being rewarded by the market currently.
Remember, there are many potential reasons to break up with or fire your investment manager, but you should make sure it is a good reason. Sometimes the initial reaction to replace a manager could look very different after digging deeper.
For help determining if you should break up with your investment manager, contact Pension Consultants’ Investment Services or call 417.889.4918. Our investment analysts will do that deep dive into the investment for you to determine why the investment triggered a review; if that reason appears temporary or permanent; and ultimately if it was for a good reason or a bad reason. Don’t just assume that short term trends are forever and fire a great manager for the wrong reason!
Let’s Get Started
Are you ready to see if you have a good plan? We’re ready to show you! Click the button below to discover your plan’s true performance.
With just some simple information about your plan, our team can see how your plan is performing in the three key areas. Then, we’ll set up a meeting with you and your team to review the results and talk about how we can help.