Asset management is a business governed by a thousand disparate philosophies. Depending on who you talk to, it can be a hard science, abstract art or anything in between. When financial advisors reach out to mutual fund managers to help their clients reach their financial goals, they’re putting a lot of trust in the fund managers’ personal investment philosophy. That means it’s the advisor’s responsibility to learn as much as possible about that philosophy before giving them control over client assets. When talking to a fund manager, it’s important to cut through marketing speak to decide whether they represent a lucrative investment or a costly money-pit. Here are five questions you need to ask fund managers.
1. What’s Your Experience And How Well Is That Experience Documented?
Documentation should always be the first item you check off your list when making any decisions about fund management. Collect any documentation you can about previous fund experience, and actively listen when they talk about those experiences. How do they describe getting started, and how did they deal with any notable successes or failures? Is there anything in the documentation that they ignore or refuse to mention in their account? If so, explore why. This can be a great opportunity to understand how they feel about their approach and their personal history in the industry. Some managers have had easy success in their careers, and you can hear it when they talk about their experience. Listen for overconfidence, arrogance or other related red flags that might tell you they have an inflated sense of control over the assets entrusted to them.
2. How Would You Describe Your Investment Strategy?
Investment strategies are the core of a fund manager’s work and can often mean the difference between the success and failure of a fund. Do they view the process of investing as a science, a series of mathematical equations that they’re obeying? Or do they see themselves as artists, listening to their gut and recognizing patterns that their peers or competitors don’t see? This is important when comparing peer investment strategies. However, it really boils down to a fund’s performance. Therefore, when reviewing a fund’s performance from the year-to-date to the 3-year, 5-year and 10-year timeframe, ask the fund manager if their investment strategy has altered at all. If so, what changed? Any new fund mandates? How does this impact new investments in the fund?
3. What Are Some Investments You’ve Removed From Your Portfolio, And Why?
Pruning a portfolio is a natural part of the investment process, but it’s also a process governed by a fund manager’s discretion. Managers can use diverse sets of information to form their impressions about a company or asset, including gut impulses and rules of thumb. Sometimes the reasons aren’t even financial. Some funds cut investments for unethical practices, aiming to build a portfolio that supports green technologies or to avoid those damaging to human life. You might agree with their decisions, and your clients might support them as well. Most portfolio managers sell a particular holding based on share valuation and risk tolerance. There’s no substitute for an informed decision, and this question can help you get the information you need.
4. How Often Do You Report To Clients?
Communication is essential in any industry, but in fund management it’s especially valuable. Managers are given control of sizable assets, and your clients deserve consistent and clear updates about how those investments are proceeding. It’s essential that the line of communication between everyone with a vested interest in those assets is open and available. Ask for copies of previous investor communications, including memos and regular updates. How long does it take them to communicate to investors that there is a problem or that a major change has been made to the portfolio? This information is an important baseline for establishing your ongoing professional relationship and determining how much transparency you can expect to experience.
5. When Has Your Process Failed?