By Mark Barnicutt on March 16, 2011
Despite having spent most of my career designing & overseeing portfolios for various types of clients, I continue to be shocked as to how much time & energy is expended in the institutional asset management world (ie: group retirement plans, foundations & endowments) on Investment Manager research relative to other parts of the asset management process.
Don’t get me wrong — I’m a ‘big believer’ in the objective approach of due diligencing & monitoring independent Investment Managers for inclusion in client portfolios — it’s just my experience that it’s NOT the only, or even, the most important job of an Asset Management Professional.
I continually see so many Investment Committees who are obsessed with picking “the best” Investment Managers and, because of this approach, get so ‘buried’ by their Asset Consultant in Investment Manager data/portfolio statistics such as Standard Deviations, Sharpe Ratios, Treynor Ratios, Upside-Downside Capture Ratios, etc. that they cannot see the “Portfolio Forest” from all of the “Investment Manager Trees”.
So, if it’s not all about the Investment Managers, what should it be about? I believe that there are five (5) broad activities that a true Asset Management Professional should focus on:
1. Investment Objectives:
– Working with clients, and their other professional advisors, to determine/quantify their investment goals (ie: future consumption/funding requirements) and the various time horizons for these goals.
2. Risk Tolerances:
– Helping clients assess, in the pursuit of their investment objectives, their true tolerance for risk in terms of potential future loss of both capital and income.
3. Investment Policy Design & Portfolio Construction:
– Based upon their Investment Objectives & Risk Tolerances, design an Investment Policy and construct a portfolio according to five levels: Asset Allocation (ie: stocks vs bonds), Geographic Allocation (ie: Canada vs the World), Investment Mandates (ie: Canadian Equity, Global Equity, etc.), Investment Managers and Investment Vehicles (ie: pooled funds vs segregated securities).
Using this approach, Investment Managers are “buiding blocks” in the overall client portfolio — they are NOT “the portfolio”.
4. Portfolio Monitoring:
– The ongoing monitoring of each client’s portfolio against their Investment Policy, together with the ongoing oversight of each Investment Manager’s compliance with their respective Statement of Investment Policy & Guidelines (SIP&G).
5. Reviews:
– Periodic meeting with clients to (i) reconfirm/validate their Investment Goals, (ii) review the performance of their portfolio against their goals, and (iii) ensure that their Investment Policy continues to properly reflect their investment objectives & risk tolerances.
As you can see, Investment Manager Due Diligence/Research is still an important & integral part of the overall asset management process — it’s just that it’s not the sole, or most important part.
Institutional clients are looking for their Asset Management Professionals to design portfolio structures that help them to diligently pursue their investment objectives & report back to them on a periodic basis as to how they are progressing towards their investment goals. Paul Rainford, one of my partners at HighView who has spent 35 years in the institutional asset management business recently said:
“In my experience, clients want us to tell them what time it is; they don’t want us to tell them how to build the watch.”
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