Look Before You Leap – Past Numbers are Not Enough!

Investors have different combinations of risk tolerance, objectives and unique circumstancesInvestment managers also come in all shapes and sizes with varied skills, styles and asset class expertise. 

The steps below provide a simplified framework that progressively narrows choices available from a pool of managers or funds.

The depth of analysis and degree of rigorousness in executing these steps to select the most suitable manager or fund, is dependent on a number of factors, including; the amount at stake, resources available, information available as well as the knowledge and skill of the one performing this task, but can be simplified into 6 key steps as follows:

1. Determine Your Objectives for Investing

Know how much you have to invest, why you want to invest, how long, and what loss you can stomach. This the first and most crucial step;

2. Pick the right vehicle

All asset classes have their unique risk/return profile, ranging from short-term, fixed return risk-free government securities to risky equities, commodities, real estate and combinations in-between. The answers to step one determines the acceptable options and combinations thereof in this step;

3. Select Manager(s) with specific expertise

Eliminate all managers with consistently poor returns as well as those who do not specialize in the asset class of interest;

 4. Know what you can and cannot live with

Of the remaining managers, eliminate the ones that do not meet your criteria for particular parameters which may be specific minimum requirements;

5. Analyze Philosophy, Processes and People

The purpose is to dig deeper into the manager’s operations to understand the structures and processes that generate the returns. Look out for managers with sound philosophy and defined strategy and who show consistency in implementation; have well-structured support processes (research, trade execution, investment decision making, etc) as well as ability to attract and retain motivated and talented people;

6. Finally, the numbers

Performance Information. The focus is not to pick a manager with high performance, but one with superior, consistent performance (both risk and return), supported by sound philosophy, structured and efficient processes, talented and motivated staff. to seek to understand any patterns and in conjunction with the results of step 5, determine whether. Watch out for return and risk cycles, total return basis, and do not forget to evaluate the risks that were associated with the returns;

Concluding Thoughts

Institutional and high net worth investors with substantial funds at stake should consider enlisting the help of an investment consultant, but most importantly, consider selecting managers that are compliant with the Global Investment Performance Standards (GIPS®).

This makes it easier for you to compare managers and funds, because, the GIPS® provides a high degree of assurance that both the information required to perform these analyses are available on demand, are standardized and that the investment manager adheres to some external, recognizable standards that can be independently verified.

What challenges do you encounter when selecting funds or managers? Submit your answers using our comments box below.