Key Questions: What Makes a Good Investment Fund Manager?

Within Key Wealth, we design customized portfolio solutions comprised of high-quality, US publicly traded securities, principally stocks and bonds managed by my colleagues led by Steve Hoedt (equities) and Rajeev Sharma (fixed income). To complement these holdings, we utilize a wide array of investment vehicles spanning the full spectrum of asset classes. Moreover, our investment platform is completely “open architecture," meaning it consists of options solely selected based on our clients’ best interests.

The following is an abbreviated summary of our selection process.

Investing is not as simple as identifying what percentage of your investments you want in stocks versus bonds. Once you go through the process of developing an ideal asset allocation, you’re then faced with a sea of investment options. There are many thousands of managers with many more different flavors of investment strategies to offer. Of course, not all managers are created equal, and one could argue that choosing the right set of investment managers could have a similar impact to setting the right asset allocations. Therefore, it is vital to employ a rigorous and repeatable framework in evaluating with which managers to place your money.

What Does It Mean If a Manager Is “Good”?

What makes one manager better than another? We would argue that a quality manager is both reliable and consistent. A reliable manager does what they say they are going to do (e.g., a US equity manager invests in US equities). A consistent manager does this over a sustained period without significant shifts in investment strategy (also known as “strategy drift”). These two attributes should generally result in investment performance that is in line with the intended asset allocation and exposure.

Key’s Framework: The 8Ps

Key’s Multi-Strategy Research team utilizes a consistent framework for evaluating investment managers. Over many years, the team has identified eight factors (all of which helpfully start with the letter “P”) that reliably indicate the quality of a manager.

The information below details some attributes that the Multi-Strategy Research team considers in its diligence process:

• People
  • Experienced and pedigreed team leadership
  • Low turnover among investment team and support staff
  • Evidence of culture that is both performance-driven and collegial
• Philosophy – Clear strategic framework to exploit market inefficiencies driven by a sustainable “edge”
• Process – Well-defined and repeatable process
• Portfolio – Robust portfolio construction and risk management with appropriate use of leverage, concentration, and liquidity risk
• Performance
  • Evidence of sustained alpha generation (net of fees) driven by explainable factors (e.g., skill vs. luck)
  • Performance that is consistent with philosophy and process across market cycles (e.g., avoid strategy drift)
  • Risk metrics that are ideologically aligned with strategy – favorable upside/downside ratio, Sharpe ratio, etc.
• Partnership
  • Strong alignment of manager interests with investor interests
  • Assets under management have reached critical mass for the strategy with stable asset flows (both in and out)
• Price – Reasonable management and incentive fee structure with a hurdle rate, high watermark, and clawback provisions 
• Principles – Appropriate appreciation of sustainability and DEI (Diversity, Equity & Inclusion) initiatives

Putting It All Together

Of course, the 8Ps do not guarantee outperformance. A manager can appear to check the box on all of these attributes and still not deliver the desired future performance, and, conversely, a manager who fails on one or several of these factors may deliver significant outperformance. Rather, the 8Ps approach is intended to significantly minimize disappointing outcomes and increase the odds that the manager can fulfill their assigned mandate.

By utilizing the 8Ps framework, the Multi-Strategy Research team curates a recommended set of managers who we believe are most likely to deliver reliable and consistent performance based on the set of factors that create the composite picture of a good manager.