Manager Selection & Monitoring

Finding the right vehicles to implement the investment strategy

Manager selection is the dual process of finding the best managers in a certain market — and even more importantly, to reject those that fail to perform. Manager selection is not an isolated process. The choice of manager depends not just on his or her qualities, but also on the role he is to fullfil in the total portfolio of a client. Although not often described in that way, a portfolio manager is simply a building block in the client’s portfolio intended to provide exposure to a certain market or investment opportunity.

We have become convinced that managers should be analysed not just on their reputation and the returns they achieved in the past. In fact, recent performance can be a very misleading basis for selection portfolio managers. Good performance in comparison to others may come from excessive risk taking; from investing outside the mandated market universe; or simply from “having been at the right place at the right time”. It should be noted that there are more portfolio managers than listed stocks or bonds in which they can invest. That makes it all the more important to separate quality and skill from luck. To fully understand a manager’s skills and weak points, a constant analysis of their holdings (“stock picks”) and their month-by-month transactions is required. In the short term, portfolio performance can be determined largely by luck; but portfolio transactions are directly linked to the intentions of a portfolio manager. Also, track records are very prone to selective presentation. A multi-year analysis of a manager’s holdings, and how they changed month after month, is a far more reliable gauge.

We have invested heavily on building a proprietary “see through” capacity — a system that allows us to continuously collect portfolio holdings and to analyse a manager’s “style”. The system is connected to the custodians of dozens of asset management companies, tracking hundreds of managers. That creates an in-depth, independent view on a large part of the investment industry. We analyse not only what these portfolio managers are invested in today, but also what investment decisions, good and bad, they made over the course of the last five years. That is very different from simply knowing the achieved annual returns. Our focus is to keep a close relationship with the investment specialist and his asset management, in order to react timely to changes in the management team or their investment style.