Best practices for manager selection

In choosing an investment manager, client need should align with manager strategy, says Philip Lee, executive director of manager research, total investment solutions, with CIBC Asset Management.

“A great starting point for manager selection is to establish a clear understanding of the manager and their investment philosophy,” Lee said in a recent interview.

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Manager philosophy will be a significant determinant of investment outcomes, so it must align with client need, such as income generation or reduced volatility, Lee said.

He also noted that this alignment requires ongoing review.

“It’s necessary to regularly reconfirm that initial understanding and the conviction in a manager that’s been identified, to ensure that there’s continued alignment with the client’s needs and expectations,” he said.

To do this, advisors can review the manager’s decisions and resulting outcomes as well as make benchmark comparisons, Lee suggested.  

Monitoring is also part of the manager selection process. 

This includes keeping an eye on the stability of the manager’s organization and team, which impacts the likelihood of them delivering on their strategy. Factors that foster stability include culture and collaboration, Lee said.

Changes within management teams aren’t inherently negative, provided they enhance resources and investment decisions. 

“Some change is healthy in order to combat complacency,” Lee said. “But chronic and large-scale changes are a distraction at best.”

On the investment side, advisors can review such things as the consistency of holdings, the stated investment philosophy and objective, and the rationale of buy and sell decisions, he suggested. 

In addition to stability, successful managers have a framework to make and refine their decisions, as well as reflect on missteps, Lee said.

“We’ve also seen that successful managers have a healthy mix of weighting their bias conviction ideas appropriately, while managing behavioural biases and being mindful of the risks they are taking,” he said.

Inconsistencies or prolonged underperformance that is misaligned with investment objectives could warrant a review of the manager. If concerns are not satisfactorily addressed, it may be time to consider a change in manager, Lee said. 

He also noted that, by choosing a manager whose investment approach aligns with a client’s goals, advisors can have more effective client discussions during periods of underperformance.

“During these periods, it’s important to review objective historical data, and glean insights through potential meetings with the manager, if that’s available, or by reviewing what their latest comments and thoughts are,” he said.

This way, advisors can assess whether the manager is doing the job they were selected for, he said. Such “informed understanding” helps avoid hasty decisions.

“We’ve seen that knee-jerk terminations can take the focus off client needs and, more broadly, negatively affect compounding returns and wealth creation.” 

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.