Selecting and Monitoring Money Managers
Going beyond mutual funds to money managers can make sense because the portfolio will be tailored to meet your needs and objectives. In general, clients with at least $500,000 of investable assets can benefit from the services of a money manager. The advantage of using separately managed accounts include:
- Personal Service.
- Tax sensitivity.
- Customization often allowed for incorporating existing securities and meeting security or social issue restrictions.
- Simpler record keeping because it is easier to track stock basis than mutual fund basis.
Investment Styles
Keep in mind that you need both portfolio diversification and style diversification. Do not underestimate the importance of style diversification. It is next to impossible to find a single money manager who will perform well in all market conditions.
The basic investment styles are growth and value. Either investment style can apply to domestic or foreign portfolios of any equity capitalization amount. A rudimentary distinction between the two styles would be that growth managers look for companies whose earnings are expected to increase at a rate faster than the rest of the market. Value managers, however, look for stocks that are currently under-appreciated and those whose worth the market will eventually recognize.
Selection Steps
The first step in selecting the right money manager is to have an investment policy. The next step is to complete and investment advisor questionnaire. The purpose of completing these steps is to get a genuine idea of your expectations.
The next step is to identify potential money managers. Here are some methods:
- Rely on past experience with the money manager.
- Use purchased computer databases such as Mobius Group's M-Search. Due diligence is the adviser's responsibility.
- Use brokerage firm databases. Due diligence is already completed.
- Use turnkey providers.
The next step after developing a list of potential money managers is to obtain information and screen the managers. Performance is important but don't let returns control your decision. Other considerations are volatility (standard deviation) of the performance and the manager's performance in both up and down markets.
It is my responsibility to be sure to compare performance to an appropriate index and become familiar with commonly used benchmarks (for example, S&P 500, Russell 2000 and the Wilshire 5000).
The basic parameters for including a money manager among those to be considered may include minimum account size, amount of money under management, number of years in the business and median account size.
Other criteria to include in the evaluation process are:
- Intangibles such as chemistry and communication (important for clients).
- Investment style/Strategy.
- Consistency of style (avoid style drift).
- Impression of key people.
- Client service.
- Fee structure.
- Reporting/recordkeeping.
Once you and I decided on a money manager, again, it is my responsibility to periodically review client accounts to determine if the agreed-upon objectives are being met. Quarterly review is recommended. Regular phone contact with the manager is a sound idea as is at least one face to face meeting per year with the client and money manager. At this meeting there is a review of the account activity, performance and personnel changes.
Selecting and using money managers can be a rewarding option for clients when the situation is right.
For more mutual fund information, visit Morningstar.net.
To check mutual fund performance, visit ibbotson.com.