How to select the right fund manager

							Investing: How to select the right fund manager

How to select the right fund manager is a question that has spawned an entire
industry. Increasingly, there is a counter-argument that maybe it is not so much that
there is no an- swer, as the wrong question is being asked. At issue is the persistent
practice by fund trustees and private investors alike of hiring and firing managers based
on the latest performance outcomes against their peers. Expertd are calling for a
complete change in focus away from short-term performance comparisons to what is
known internationally as ‘goals-based investing’.

Fund managers typically measure their worth based on the amount or return they
achieve for every unit of risk they assume. ln their world, risk is measured as volatility
of returns, or standard deviation of returns. But to investors, risk may mean loss of
capital or purchasing power. From this perspective, goals-based investing allows
investors to select their asset management solutions based on the specific financial
goal they are trying to achieve.

The biggest single threat to people meeting their investment goals is not the occasional
under-perforinance of fund managers, but the lack of confidence by members or
trustees in staying the course of an investment strategy. Not only is chopping and
changing course a costly exercise, but most people are notoriously bad at getting the
timing right. If the goals-based investment concept could take hold, it could be a
powerful force in changing destructive investment behaviour and in aligning the
interests of the investor and their investment managers.

Investors would be starting with far more realistic expectations, have a higher probability
of achieving them, and as such, be more inclined to ‘stick with the programme’. And
from the fund manager’s perspective, what a win for them to be focusing on meeting
specific client objectives in the time-frame required and not have to worry whether next
quarter’s underperformance will see them to the door. According to research by
investment Solutions multi-management, at the average investment manager, 74% of
investment staff joined within the last five years, and 51% joined within the last three
years.

“You won't find many investment professionals with experience from the last bull
market,” says Mark Lindhiem, investment Solutions senior manager: research analyst,
”and maybe not too many with experience of the last bear market either.” Nor should
you expect to find an invest- ment house’s chief investment officer to have too many
grey hairs. if these figures seem high, it’s a percentage that has not worsened in
recent years, and in fact, is better than statistics in the UK. Ian van l\liekerk, chief
investment officer of Citadel Private Client Wealthcare, offers some practical tips in
choosing a fund manager: “You have to have made the decision that you do not want to
simply invest in an lndex fund, such as Satrix.
”Secondly, look for someone who can explain what they do, who has a process and
can back it up. If they can’t explain it, then they probably don’t understand it
themselves. ”Thirdly, they must have the discipline to follow that process, because
poor discipline is where most fund managers fall down,” explains Van Niekerk.
”Fourthly, look for consistency. Find evidence of written commentary or portfolio
reports from several years ago, and see what they said then compared to what they
say today. Then, the last thing you look at is past investment performance,” adds Van
Niekerk.