How to Judge Your Managers?
- Robert Hayes
- Mar 24
- 4 min read
A Guide for Charity Trustees
When assessing an investment manager's performance, it is essential to focus on the future. While past results may evoke disappointment, the key is to take an analytical approach, using data to inform decision-making. Changing managers can be costly, and no one wants to 'throw the baby out with the bathwater.'
Step 1: Understanding the Original Mandate
The first step is to review the original mandate, objectives, benchmarks, and constraints. Performance should be assessed within this framework. Key constraints that may have influenced results include:
Geographic limitations - e.g., minimum exposure to UK equities or a cap on overseas investments.
Investment style - such as a requirement for a minimum level of dividend yield.
Sector restrictions - often linked to ESG policies that exclude or limit certain industries.
Currency exposure limits - which may require hedging or implicitly restrict overseas investments.
Step 2: Evaluating the Manager's Stated Approach
Next, consider whether the manager has adhered to their stated investment approach. In essence, based on their past statements, could you have predicted their performance given market conditions? Key questions to ask include:
What did they say they would do?
Have they done what they said they would do?
If not, why not? Do their reasons make sense?
For example, if a manager claimed to prioritise investing in low-valuation companies, they are unlikely to have performed well in a market dominated by high-growth, high-valuation technology stocks. However, if they have recently shifted their portfolio to include such stocks, it raises the question: have they changed their approach, and are they now chasing trends rather than sticking to their strategy?
Step 3: Breaking Down Your Manager’s Role: A Four-Part Assessment
The most difficult decision is whether to retain or replace the manager. A typical UK charity investment manager fulfilling a multi-asset or balanced mandate provides four key services. Each should be assessed individually, both in terms of past performance and future capability:
1. Strategic Asset Allocation
This process translates your investment objectives into a long-term benchmark allocation. While some managers claim not to be benchmark-driven, regulatory and business risk considerations typically mean they operate within implicit guidelines. Many also use external peer group comparisons to inform their allocations.
Does the manager’s approach align with your objectives (e.g., CPI + 3.5%)?
How thoughtful and appropriate is their process for setting asset allocations?
How frequently do they review and adjust their long-term strategy?
2. Tactical Asset Allocation
Tactical asset allocation (TAA) involves short-term adjustments to overweight or underweight certain asset classes, aiming to add value relative to the strategic allocation.
How significant are the manager’s tactical shifts?
How much risk do they add relative to the strategic allocation?
What is their historical success rate in adding value through tactical shifts?
Do they have a genuine forecasting advantage, or are they just following market trends?
3. Stock Selection
Stock selection is often the primary focus for active managers and their clients. This aspect differentiates active management from passive investing.
What is the manager’s stock selection philosophy? (e.g., do they focus on high-growth companies or undervalued assets?)
What is their selection process? (e.g., quantitative models vs. fundamental analysis)
How is the portfolio constructed? (e.g., how do they balance risk and reward?)
What are the manager’s sources of repeatable competitive advantage?
How have they performed against passive alternatives?
Given the challenge of consistently outperforming passive strategies, managers should demonstrate clear and honest self-assessment, acknowledging the difficulty of generating excess returns.
4. Service Quality
A strong service proposition extends beyond investment returns and can include:
Smooth administration and reporting.
Stewardship and ESG-aligned voting policies.
Value-added services such as trustee training.
While service may not always be a primary selection criterion, poor service is often a deciding factor in manager reviews and replacements.
Step 4: Active vs. Passive Considerations
Apart from service quality, all of the above elements of an investment mandate can be implemented passively. To justify active management, trustees must believe two things:
That certain managers can consistently add value, net of fees, relative to a passive approach.
That trustees (with assistance where needed) can identify and appoint such managers prospectively.
At PMCL, we do not advocate for either active or passive strategies in isolation. However, we strongly believe that clients should clearly understand what they are paying for and why. By thoroughly assessing investment managers against the four key service areas, trustees can make well-informed decisions that best support their charity’s financial objectives.
How Can PMCL Support?
Reviewing an underperforming investment manager can be a complex and time-consuming process, requiring careful analysis of their strategy, performance, and service proposition. At PMCL, we specialise in helping charities navigate these decisions with confidence, ensuring they have the right investment partners to meet their long-term objectives. If you would like support in assessing your manager or exploring alternative approaches, please don’t hesitate to get in touch.
Disclaimer:
The information presented is intended for organisations and individuals with professional investment experience. Portfolio Manager Consultancy Ltd is committed to serving professional clients, ensuring our advice and insights align with the sophisticated needs of this group. We encourage those who do not have professional investment experience to seek advice before making any investment decisions based on this update. For a full understanding of our terms and the scope of our advice, please consult the disclaimer provided.
