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How to compare investment management firms?

Finance

Kate Scranage Governance professional at Kate Scranage Governance Solutions Posted 1 year ago

Hi,

The trustees of one of the charities I support are reviewing their investment management arrangements. Is there an impartial source of data that compares the performance of established investment management firms against benchmarks? Individual firms are very good at cherry picking the data that shows you how they have out-performed this or that over X period, but it's hard to get an overall objective picture of how they compare against each other.

Thanks 🙂

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Philip Wilson Staff PANEL

Volunteer at Whisper 1 year ago

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If this is about brokers offering to manage a bespoke investment portfolio then no, I don't think there is a readymade way to compare their performance. It would be a matter of finding somebody with a financial background to review what they've told you. Managers are typically assessed against a total return index, that's to say a stock market index or similar, plus dividends paid out. People often try to adjust the portfolio returns for risk using the Sharpe ratio, which just considers the volatility of the returns so it's quite a limited way to assess risk. What you really want is good future performance, and good past performance doesn't always indicate that, because markets change. From a performance point of view the last 15 years have been difficult for active managers; with the rise of passive investing, many of the benchmarks against which financial performance is assessed have done unusually well and most active managers have underperformed, including managers who used to be famous for good performance. I would want to know how the manager obtained their performance, for example if they construct their portfolio to look a lot like their benchmark to avoid underperformance then that's fine unless the benchmark declines materially, which could happen right when the charity is most needed.

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Julien Haye Staff PANEL

Trustee at NCT 1 year ago

Hello - I recently completed the same exercise with the charities for which I am a trustee. Also, coming from the asset management sector, I would say that there isn't a straight-forward answer to the question you asked because it depends on several factors. But here are some thoughts that might be helpful:

1) What is your investment policy, assuming you have one? Do you have any exclusions?

2) What type of investment strategy and instrument do you currently use? Some investment strategies can be very expensive and lead to a significant transfer of value between the charity and the investment manager.

3) What type of management fees do you currently pay independently of performance?

4) Do you rely on dividends or interest to fund all or part of your charitable activity?

Investment managers will show you what you asked them. They won't necessarily show you what's best for you unless you frame the request in a specific way, partially based on the answers to the above questions.

To pick the most suitable, we organised an RFP with a handful of investment managers. We also asked them to review the current investment portfolio and provide their perspective on what they would change to reduce costs while maintaining both the risk profile and long-term expected returns.

With that in mind, in one of the two charities I work with, a fellow trustee and I saved close to 10% of the invested amount over 10 years by forcing a change of portfolio structure to less expensive funds. For the other charity, the exclusions led us to adopt a more expensive investment strategy.

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