How does an investor stay on good terms with its investment manager firm (I.M.)? In the first half of his talk, Sidney Hardee, Managing Partner of Hardee Brothers, LLC., spoke about hiring and firing. In this, the second half, he comments on the search, fees, taxes, and complexity. He was the sole presenter at the one-hour webinar “Hiring and Firing Investment Managers” sponsored by the Chartered Financial Analysts Institute on January 15, 2020.
Search
Hardee distilled the search for the correct I.M. down into four questions.
- How will I identify good investment managers?
- How much will it cost to gain exposure?
- How will I monitor managers?
- How about manager turnover?
“How do you apply what you learned about risk?” he asked. “Make sure your investment managers can articulate that back to you.”
An I.M. needs to have a clear sense of what it costs to operate in the market. “Have smart people talking to you about what you’re doing—this is very important to shaping your decision-making.” He urged the I.M. to staff itself with actual advisors, not just folks who can rubber-stamp a decision. Also consider whether these people work together as a whole to maximize performance.
Fees
Hardee touched only briefly on fees. Here are the four main questions to consider.
- What are the effective all-in fees?
- Who pays for service providers?
- Do fees align investor and manager incentives?
- What are the alternatives?
Access
Investors have different liquidity needs, depending on their other commitments. Here are the questions Hardee says the I.M. should answer to the investor’s satisfaction the following questions:
- How can I access my capital?
- What is the underlying liquidity of the assets?
- What is my investment vehicle?
Complexity
“You must be able to explain what an investment manager does so that the stakeholder can understand it,” he emphasized. “There are basic building blocks of strategy.” He said the modelling approach and the sources of data should be explicable in general terms to interested parties.
- Why does this strategy need to be complex?
- How robust is the system?
- Can you explain the strategy to the stakeholders?
- How is risk management handled?
Further reading
Hardee closed his comments on selecting an I.M. firm with a pointer to the background material. Topics in investment manager selection are available as a selected reading through the Certificate in Investment Performance Measurement (CIPM) program, part of the CFA Institute.
The recording concludes with the Q&A session. ♠️
Click here to view the one-hour webinar presentation.
Click here to read about the first part of this presentation.