When it comes to dealing with an investment manager, investors frequently err in one of two ways. They fire managers they should keep and keep managers they should let go.
This applies equally to a personal investment manager and professional investment manager of pools such as mutual funds.
What’s Behind the Poor Performance of your Investment Manager?
Instead of automatically terminating an investment manager with poor performance (or redeeming your mutual funds), first find out what is behind the disappointing results.
For instance, an investment manager may be getting mediocre returns because his investment style is temporarily out of favour. Fire him now and you’ll miss the rebound in performance when the style cycle shifts.
Or you might have a “defensive” investment manager sitting on large cash reserves because of a speculative market environment. His performance may be suffering now, but if you drop him for a more aggressive investment manager, you’re inviting trouble when the market inevitably cools down.
Over a decade even the best performing managers can spend a couple of years in the bottom quartile. Clients often only evaluate short-term performance results.
Stay Informed in Good Times and Bad
Conversely, sometimes an investment manager should be fired in spite of good performance. Be prepared to take action whenever you see any of the following:
- A change in investment style
- A big increase or reduction in assets under management
- A new portfolio manager on your account
- A rash of legal or regulatory problems
- A flurry of new product offerings
- The senior partner buying a personal jet or a second vacation home
- The name on the door changes.
Of course, sometimes performance is a valid reason for terminating an investment manager.
If a manager has had two or three years of mediocre returns compared to others following the same style, or has consistently under-performed the market and has had truly terrible results, it may be wise to cut your losses.
There may be times when you decide to fire an investment manager who has done a good job but your investment goals have changed, e.g. a shift in focus from long-term growth towards a focus on maximizing current income.
Generally, it’s not a good idea to change your investment manager too frequently or too quickly. It takes time to become comfortable with a manager and for them to prove their worth.
You should hire an investment manager only after careful research and thoughtful deliberation. The decision to fire a manager should be made in exactly the same way.