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Choosing an investment manager

Gemma Woodward, Executive Director at Quilter Cheviot provides practical guidance on choosing the right investment manager for your charity including research and gathering recommendations from your network, reviewing proposals and reading between the lines to make the best choice.

We’ve all been there – that item that looked so alluring in the shop window doesn’t seem quite so nice once we get it home. But while you can always take a physical purchase back, it’s much more difficult when you’re buying a service like investment management.

There are several ways charities can make sure they get the service right first time however. In many ways, choosing an investment manager is no different to deciding upon any other service. The first thing most people do is ask around – either by consulting with close family and friends, or reading online reviews of a service.  It is always worth seeking word of mouth referrals from other charities.

Always remember, however, that an investment manager has to be right for you. For some charities, an investment manager’s fund (a common investment fund or other fund type) might be exactly the right solution; for others a segregated portfolio (i.e. holding direct positions in bonds, equities and funds) will be a better fit. Sometimes five minutes on the telephone, talking through a firm’s offering can save hours of wading through tenders from firms that were never going to be the right fit.

When the proposals do come in, think about what really matters to the trustees of the charity and its officers. That might be online reporting, trustee training or regular meetings with the investment manager. The key thing to remember is that each investment manager may have different strengths.

Of course, no company will want to admit it’s strong in certain areas and weak in others. They’d rather just dazzle you with their brilliance. So think about how they act when they’re going through the proposal process. Client-centric should be a given – who else are they serving! But do they respond to you in time, have they given straight forward answers to questions and addressed your concerns, or is it just a stock response?

Many investment managers will say that they offer a tailored approach. It’s important charities understand what they mean by this. Investment managers now have to show that the investment portfolios of clients are ‘suitable’ for them and that they aren’t taking excessive risks for what their clients need.

For the most part, investment managers therefore use an investment framework that enables them to meet the defined risk profile requirements (which will have been set at a house level) by ensuring that portfolios which have the same risk profile as one another also exhibit a reasonable degree of commonality between one another and hence ‘proving’ suitability. So if I manage two charities which are both concerned about preserving the real value of the portfolio (i.e. keeping up with inflation) and generate an income yield of around 3%, then the investment portfolios I run for both will look very similar.

In my experience, after being co-opted onto a number of different charity investment committees there does not appear to be a secret formula enshrining what a charity wants from its investments or managers. However there is always one common ingredient – trust. A bit of integrity goes a long way.

And if you don’t like your current investment manager?

If the future-proofing has not worked and the charity is perhaps a couple of years into the relationship (hopefully not just a few weeks) and senses the manager is not quite living up to the initial billing and feels let down, the first question to ask is: has anything changed? Look at the three Ps:

People: you don’t know/trust the person who manages your money

If you no longer know or trust the person who manages your money, you have to think about why this might have changed. It is possible there has been a change in the trustee group or at the investment manager. The chemistry on a committee (of any kind – not just charities) is fascinating – a change in a key member of the committee may significantly change the dynamic at meetings and the relationship with the investment manager.

The new members of an investment committee may have different approaches or views, and the actual shape of the committee in terms of its thinking may have changed as a result. If this is the case, and a sense of unease is breeding amongst the trustees then it is perhaps worth getting together and exploring what has changed. If the representative from the investment manager or support team has changed, then bear in mind it might take time for a relationship to develop. If performance remains good then you might want to give it time before changing investment manager.

Performance: your investments haven’t done as well as you hoped

I have absolute sympathy for a charity that is concerned the investment manager is not performing well. Nerves of steel may be required to change manager, especially if you’re at the beginning of a three to five year investment period. It is always worth comparing the performance of the charity’s fund to peer group measures, remembering to compare like with like. If your concern translates to ‘we have lost all trust in this investment manager’, you need to review what you require from your investments and seek another steward.

Perception: your charity feels it is receiving poor service

It may be the more senior representative from the investment manager has not attended a meeting recently, emails or telephone calls are not being responded to in a timely fashion, or it just feels like you’re not being listened to. If this is the case, speak up. How the manager reacts to your concerns will enable you to conclude whether further action is required.

Conclusion

Remember the charity is the client; it absolutely has the ability to take its custom elsewhere if it feels that it is not getting the service or performance it believes it should receive. The Trustees also have a legal obligation to ensure they continue to receive appropriate advice.