We feel your investment manager plays a critical role in your organization’s success. If investment returns are “good”, the organization might have more funds to spend; if returns are not as “good”, the organization may have fewer funds to spend potentially making it more difficult to pursue its mission.
Hiring an investment manager can be complicated and time consuming. A disciplined approach to this process is important. First, organizations must decide how they want to work with their investment manager:
- Does the organization want to have direct contact with the portfolio manager for their endowment or will they accept working with a surrogate or a client service representative?
- Does the organization want to be consulted on the rationale for overall portfolio strategy?
- Does the organization want to be able to communicate directly with their portfolio manager when questions arise?
- Does the organization have any unique needs or will the organization be satisfied if their endowment is managed as a model portfolio shared with other investors?
Answers to these questions are vitally important given recent changes in the investment management industry. Many firms have separated their investment management and asset gathering functions into two distinct groups. Typically, such firms assign client service representatives to work with clients and do not provide direct access to their portfolio manager. Other firms that have not separated their investment management and asset gathering functions continue to provide direct access for clients to their portfolio manager. If the nature of the relationship the organization would like to establish with its investment manager is of great importance, than the ultimate selection of an investment manager may very well be influenced by the service model of the candidates.
The organization should now be ready to address the four key components of evaluating a potential investment manager:
- The quality and reputation of the firm and the experience of the investment team (portfolio managers, research analysts, traders, etc.). Does the team have an individual or a collective approach to making recommendations? How long has the team worked together? If a single person manages the portfolio, does the firm provide adequate support for that individual? How stable is the firm from a business standpoint? Answers to these and other questions are important in determining if there might be distractions related to the operating environment which could negatively impact an individual’s focus on investing.
- The philosophy that guides the firm and its investment process – straightforward and meaningful is preferable.
- The firm’s investment process should reflect its philosophy and be consistent over time.
- The firm’s performance.
Using the Investment Policy Statement as a reference, the organization should establish criteria for the selection of an investment manager, making sure that the criteria are multidimensional. This is intended to avoid placing too much emphasis on any one criteria, for example, historical performance, and giving that criteria undue weighting in the organization’s decision-making process.
In addition, the organization should:
- Clearly articulate to prospective investment managers the role they will be expected to play and the assignments for which they are being hired.
- Evaluate performance over the long term.
- Conduct both qualitative and quantitative reviews.
- Give weight to the firm’s record of compliance with regulators.
- Allow adequate time for interviews, especially if the candidates are going to be making presentations to the organization. Script key questions ahead of time, being sure to include all of the questions you have, being tough, if necessary, but fair.
- Pay close attention to all investment fees (management, performance-based, etc.).
Many organizations begin the selection process by distributing a Request for Proposal, commonly referred to as an RFP, to investment managers they know. Others publish their RFP on their website and advertise to let prospective candidates know a search is underway. The RFP should request all of the information the organization will need to evaluate candidates and to select a small group of finalists that will be invited to make a formal presentation to the organization. A sample RFP follows at the end of this document.
After meeting with the finalists, the organization should be in a position to make its decision. However, there may be instances in which the organization has a difficult time coming to a conclusion. A suggestion – all other factors being equal, select the candidate with whom you are most comfortable and that you sense will be most likely to help you work towards the organizations’ goals. Be sure you understand their approach and how they may work with you.
(Note: Some organizations retain consultants to assist them in selecting an investment manager. Consultants do not manage investment portfolios, they offer other services, including assisting organizations with the development of Investment Policy Statements, Spending Policies, and asset allocation strategies. In addition to incurring the additional expense for a consultant’s services, evaluating the performance of a consultant can be difficult. For example, who is responsible for a manager who performs poorly, the consultant who selected the manager or the manager? Committees that try to minimize expenses and want a direct relationship with the people responsible for investment decisions tend to search for managers directly rather than with a consultant.)