Investment Manager Selection

The primary purpose of investment manager selection is to identify the most appropriate organisation, or combination of organisations, to put into effect an investment strategy which has previously been developed by trustees.

What Investment Manager Selection Is Not

The purpose of investment manager selection is not to identify managers who can 'add' value. Investment managers do not add or create value, rather they deliver it. The value which investment managers deliver represents due compensation for the investment risk to which they have exposed their client investors' funds.

Investment managers which follow an active style will invariably claim (as their raison d'être demands) that they add value. In order to demonstrate that they will compare the returns which they have achieved with the notional returns of a market index. However, investment managers do not often confine their choice of securities to those which comprise the relevant index, but instead include securities outside of that index. In that event managers cannot use the index to demonstrate that they have 'added' value.

For example, one could not compare the investment returns of a 'cash' portfolio which contained floating rate notes and corporate bonds (which most investment managers invest in) with the 90 day bank bill index, and then claim that one had 'added' value if the investment returns of the portfolio exceeded the index. Those investment returns ought to be higher in compensation for the additional risk which investment in those securities presupposes.

Even where an investment manager confines its available range of securities to those securities which represent a particular index, and then measures its own performance against that index, any investment returns achieved by the manager in excess of the index return do not represent value which has been 'added'. Any subset of securities within a particular set of assets will almost certainly have a different risk characteristic to the complete set, and will consequently have a different rate of return.

For example, the risk and consequent return of a small cap portfolio of stocks selected from the MSCI will likely be markedly different to the risk represented by the MSCI itself. An investment manager with a portfolio skewed towards small cap stocks cannot then claim to have 'added' value if the portfolio return exceeds that of the MSCI.

Manager Selection Criteria

The criteria applied in the selection process parallels that which is normally adopted in the prudent selection of any business supplier. One is not searching for today's prima donnas, but is instead applying a range of objective measures to identify the most appropriate manager or managers for the investment of scheme assets.

The criteria which are applied in that measurement are an outworking of the relative degree of importance which trustees attach to each aspect of the investment management function. Some of the more common selection criteria adopted by trustees are:

Financial strength of the organisation;
Business systems;
Track record of product innovation;
Market reputation;
Relevant experience of key people;
Staff qualifications;
Depth of resourcing;
Investment process;
Diversification of assets;
Product tax-effectiveness;
Product fund flows;
Management fees;
Buy/sell margins and application;
Custodial fees;
Risk-adjusted investment performance;
Service performance;
Reporting.

Consulting Service

The consulting service ensures the establishment of meaningful and realistic investment objectives, and identifies the strategic options available for achieving them. The agreed level of risk is quantified, and the universe of permissible assets which may be invested in is identified. Managers and their products are assessed by means of a competitive market tender, and a range of potential combinations is examined from single to multi-manager structures, including sector specialist and balanced manager options. Manager agreements are negotiated, and contracts are prepared which accurately reflect the terms, conditions and pricing agreed upon. Investment mandates are produced which embody the investment requirements, guidelines and constraints for each manager.

What We Deliver

The benefits which clients receive from an independent review of investment strategy and management conducted by National Benefits are:

An demographic analysis of scheme membership;
An analysis of benefit design and scheme liabilities;
An examination of trustee and member expectations for investment returns;
The identification of appropriate levels of investment risk;
The documentation of measurable and time-bound investment objectives;
An investigation of investment options and the formulation of an appropriate investment strategy;
The appointment of the most suitable investment managers selected through a competitive market tender;
The preparation of investment mandates which correctly embody the requirements and constraints for each appointed manager;
The preparation of investment management agreements which accurately reflect the agreed terms.

Further Information

If you feel that your scheme could benefit from an independent review of its investment strategy or management, please contact us.