Talking to asset managers is always difficult. Yes you can have a great sense of their returns by looking at the myriad of stats available, (1-, 3-, and 5-year rolling returns, batting average, up- and down-capture, sharpe ratio, information ratio, to name a few) and you may even have a good qualitative assessment of the firm (their process, depth of their team, culture of the firm, etc). But to hear a manager pitch his fund is a grueling process.
You are always left wondering: how the hell can I assess whether the manager will outperform the market over the investment horizon (say a year or so). Does it even matter if the market is down 20% over the subsequent year?
Security selection is the part of the portfolio management process that is vital, and we historically were of the opinion that why complicate things? Throwing in a slew of more variables to analyze makes the process that more complicated. Let’s say conservatively when looking at 10 equity markets globally, along with 4 bond markets, plus commodities, you closely evaluate 5 indicators per market:
As you can imagine, this in and of itself is plenty of variables to
But now you throw in fund managers into the equation. Here is where it gets complicated. Client gives you, Advisor, the money, and you can either allocate directly to “markets” or invest in managers, that then invest in the markets.
Unfortunately we think there are so many negatives involved in this process, that it is never worth it. Let’s start with some key facts:
- 75% of all funds underperform “the benchmark” net of fees
- Clients pay you and then you are implicitly paying the manager *double layer of fees!*
- Manager screening is another significant challenge for any advisory firm
- Historical returns and wonderful pitchbooks are no indications of future returns
We think the model an investment advisor should proceed with is a combination of an asset manager (bottom up security selection + top down macro views) plus the investment advisor (matching capital market views to client-specific situations, ie portfolio allocations).
Tags: Asset Allocation, manager due diligence, portfolio management process, security selection