The Attributes of a Good Fund Manager

By Hamish McPhail, LL.B, GDipBus (Personal Financial Planning), CFPCM, Financial Adviser – Investments, Director of MFAS

Eminent NZ research house My Fiduciary have compiled a list they call “The Hierarchy of Portfolio Decisions”. In descending order of importance these are:

  1. The time horizon of the investment strategy – the most common “losses” we have seen over the years is when an investment must be sold to meet a financial requirement, but the investments have not been structured to fit this timeframe and need to be realised in a period of negativity.
  2. Appropriate level of risk/return – all investments have risk, but some are far riskier than others. Risk needs to be measured on an individual basis with a helicopter view of current position and objectives.
  3. Asset classes considered  – this points to the oft quoted and sometimes ignored requirement of wide diversification of assets.
  4. Mix among asset classes – once diversification is available asset allocation will be the main driver in terms of risk, return and provisioning income for retirement purposes.

Surprisingly last in importance in the My Fiduciary Hierarchy is the fund manager itself. Nevertheless, the attributes of a good fund manager will enable your financial planner to cover of the critical 4 points above. What are these attributes?

In terms of diversification your fund manager must have New Zealand and Offshore based assets encompassing fixed interest (cash and bonds), property, utilities and infrastructure and of course shares. The world of investing is changing quickly with interest rates at 20 year highs, new technologies changing our lives and the move towards a carbon-neutral world gaining greater urgency. Your fund manager should be able to look at the bigger picture, analysing global shifts, and using them to develop guiding themes in your portfolios around the traditional building blocks of bonds and shares. And whatever decision is taken, it should be considered for its impact on society and environment.

Our view is that if this fund manager is earning its fees, it must include risk mitigation in its investment framework which starts with diversification and extends to the use of hedge fund techniques of including managing foreign currency exposure. Hedging may mean employing a niche manager who specialises in this aspect, investing short (a way of profiting from falling asset prices), buying options to limit volatility and future contracts to enhance liquidity. By managing risk your manager will be limiting the impact of falling markets and also ensuring funds are in the best possible position to make the most of the eventual rebound that will follow.

The above criteria are not a panacea for always getting it right every time, but over the long term, with points 1-4 appropriately strategised, a good fund manager will deliver reliable compounding returns to meet your planned investment requirements.