The Savvy Investor Manager Selection and Mandates covers popular research on the science and the art of selecting an investment manager (i.e., governing factors which determine the successful hiring of fund management companies), all purporting to ‘alpha’ generation.
Manager selection looks to identify the attributes of successful management practices and decision-making, generating return on investments, and typically following a mandate appropriate for the investor. At this level, selection usually is dictated by strategy – is the investor looking for an active management service, or a passive one...
During the selection process, whether it be active or passive, a manger shortlist would be collated, ranking several qualifying attributes that matter to the investor based on their investment parameters. These factors may be risk appetite, return expectations, reporting capabilities, support services, administrative duties, resource facilities, and reputational risk. Each condition varies from investor to investor in terms of what matters most.
The involved parties typically put service level agreements in place, identifying the level of information required to produce, the type of investment strategy to be adhered to, and the fees applicable for such service. Due diligence is a continual process that continues well after management selection has taken place. This is to ensure continual alignment with the investor on any change in circumstance or risk appetite within the investment selection process, performance stability and sustainability. Was it luck or skill?
‘Adding value’ is mostly a relative perception of fixed importance – Who decides whether value has been added? And if so, how much? Whether by chance or by design, outperforming a benchmark is considered adding value, or mirroring the same return but experiencing less volatility. Both strategies yield value, but differently depending on what you’re trying to achieve. An investment mandate in this situation might provide clarity on which method added the right level of value.
An investment mandate governs how a manager may use an investor’s funds. The mandate guides the actions of the manager in the return-on-investment (ROI) target, accepted risk levels, investments to undertake or to avoid, and other rules as appropriate. Index funds, exchange-traded-funds (ETFs) and university endowment portfolios all have investment mandates.
Manager selection and Mandate pertain to:
- Stock capitalisation levels
- Turnover, ROI, growth, income
- Domestic or international investment
- ESG requirements and investment transparency