Choosing a manager

Choosing an investment manager is an important venture and one not to be taken lightly.  To that end, here are some guidelines that will serve you:

Look for a documented track record.  Are the manager’s returns net of fees, as they should be?  Are benchmark comparisons included?

Note the quality of the manager’s references.

Define the manager’s investment style.  Has the style drifted?  Excellent managers use a specific style and stay with it.

Is the manager a “closet indexer”?  In any field of human endeavor, only 10% of the players blissfully run with inspired excellence – the others are doing a decent job, marking time.  In money management many of the 90% who comprise the herd invest to approximate the indexes, without explicitly saying so, at higher cost than an index fund.  They are closet indexers.  They are managing relationships (with soothing words and leather chairs), not managing money.

What reason is there to believe the manager’s investment style that was successful in the past will be so in the future.  To what degree were the returns affected, or even determined, by the market cycle just completed?

Choose an investment manager with a specific risk management method or sell discipline.  No investment style works all the time and all managers have losses.  How does the manager minimize them?

Understand what normal and high drawdowns the manager expects.  If the manager believes a 20% periodic loss of capital (drawdown) is routine for its investment style and you feel a 10% loss would be an emotionally traumatic experience, don’t hire the manager.  Avoid surprises by understanding this point and having your “ah-hah” moment in advance.