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9 Steps to Researching Money Managers

Posted by Gabriel Burczyk | Founder & CEO
November 19, 2013

Hiring a money manager is one of the more important decisions an investor can make, and it’s also a challenging one. To make matters a bit easier, we’ve outlined nine steps an investor should take to get the research and due diligence process started.

  1. Is the Money Manager’s Performance Real or Hypothetical?
    First order of business - are the performance numbers real? In some instances, a money manager will develop a strategy and then “back test” it to generate historical results. This is also known as hypothetical performance. This tells investors how the strategy would have performed, not how it actually performed with real money.

    Investors should be wary of any performance that is considered hypothetical or “back tested.” It’s easier to figure out what investments would have performed well in the past than perform well moving forward. If the performance is not real, consider moving on and instead find money manager strategies that have real performance.

  2. Is the performance GIPS compliant?

    Review performance information to find out if money manager’s performance numbers are GIPS compliant, which stands for Global Investment Performance Standards. These standards were created and administered by the CFA Institute, and are a globally accepted methodology for calculating and presenting investment firms’ performance history.

    Money managers voluntarily apply to adhere to GIPS standards. To become GIPS compliant, the money manager must then be verified by an independent third-party to ensure compliance with guidelines.

  3. Determine the Money Manager’s Investment Objective

    Understand what type of investments the manager is making. Is there a focus on dividend stocks? International fixed income? Is there a defensive strategy? This information can save an investor some time - if he or she is looking specifically for a Small Cap Growth manager, there’s no need to waste time evaluating Value managers.

  4. Evaluate a Money Manager’s Long-Term Performance Track Record

    What’s more important than performance? Long-term performance. If a manager has a great year or even 3 – 5 great years, that’s probably still not enough information to determine how successful they’ll be over time. The key is to find a money manager that has demonstrated the ability to perform well across various market conditions and cycles.

  5. Measure Performance against an Appropriate Benchmark

    A benchmark provides a basis for comparison. For example, if your portfolio is up 20%, that may sound great, but what if the market was up 40% that year? Using the correct benchmark is equally important. A money manager who focuses on Large Cap US equities should probably not be compared to the NASDAQ (which is a technology-focused index).

  6. Compare Performance With Money Managers That Have the Same Investment Objective

    Once you find a money manager strategy you find appealing, compare it to its peers. You can find additional strategies that have the same investment objective, and compare performance across all of them. You’ll discover that there are probably a plethora of similar strategies, with only a few that perform well over the long run. It’s important to know who the competition is and how they’re doing.

  7. Research the Portfolio Management Team

    Hiring a money manager shouldn’t be much different than hiring a new employee and a money manager strategy is only as good as the portfolio management team. Investors should learn as much as possible about the investment committee’s background, experience, and values. Have the portfolio managers been managing the strategy for a long time, or have there been recent departures or replacements?

  8. Analyze Portfolio Strategy Characteristics

    If this key sounds a bit more complex, it’s because it is. Here investors should examine things like risk profile, portfolio turnover averages, tax efficiencies/strategies, sell disciplines, and so on. It is probably a good idea to have a professional advisor help with this step.

  9. Consider All Fees and Expenses Associated with Investing

    In addition to annual management fees, be sure to check if there are any account related maintenance fees, transaction fees for trades, or any other fees. 

In some cases, conducting the above research can be exhaustive, and the information can be difficult to obtain. At WrapManager, we specialize in choosing money managers for our clients, and we can provide you with information on many money manager strategies and compare them against their peers. Learn more about researching money managers here

We can also help you evaluate which managers might make sense for you based on your needs. Give us a call today at 1-800-541-7774 to learn more.

 

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