While Managed Accounts have long been used by ultra-high net worth investors and institutions, investors of more modest wealth are able to gain access to professional money managers through WrapManager. Since many of these managers do not market to the general public and many have investment minimums too high for all but the wealthiest individuals, comparing managers and choosing the right ones can be difficult.
We use a database of over 1,000 money management firms, most with multiple portfolio strategies. From this group we select a very few managers that we actively recommend to our clients. We do not attempt to predict the next ‘Hot’ manager, style or asset class. We believe that market conditions sometimes merit the overweighting or underweighting of certain asset classes, but that broad asset class coverage is appropriate for most investors. Usually we have a universe of seventy to eighty manager strategies under contract to potentially use. From among these we attempt to have two or three recommended managers in each asset class.
As we evaluate candidate managers for recommendation there are many factors to consider, including the manager’s experience, the economic outlook, the current market attitude toward a given manager’s strategy, and the risks inherent a manager’s strategy. When evaluating performance, we compare managers of the same asset class and style on a number of factors including:
- Consistency — We look for managers with consistent returns over a number of years, in all kinds of markets. The manager who is never number one, but always a top contender is often a better choice than one that was number one last quarter, but a poor performer in five of the past eight quarters.
- Alpha — We look for managers with a positive Alpha, a statistical measure of excess returns over the market. Generating Alpha consistently over three to five years is very hard. Few managers can do it. Other things being equal, the higher the manager’s Alpha, the better.
- Beta — Another important statistic, Beta is a portfolio’s correlation with the market. A portfolio with a beta of one will move up and down in lockstep with the market, one with a Beta of negative one would move in direct opposition to the market. A Beta of zero is uncorrelated to the market. A manager with a Beta greater than one is taking more risk than the market in general. This is not in itself a bad thing, but investors should demand proportionally superior returns to the market in general in return for assuming greater risk than the market. The question is: will an asset — or a manager — with a high Beta actually deliver proportionally better returns than the market? A Beta of less than one is less risky than the market in general. We try to use managers with low Betas, or those who have historically generated returns high enough to justify the risk of a higher Beta.