Choosing a charity investment manager
We’ve all been there – the item that looked so alluring in the shop window doesn’t seem as shiny and wonderful once we get it home. If it’s a piece of clothing, we can take it back to the shop. For a charity which feels short changed by its investment manager the process is not so straightforward, however. So is there a way to future proof against buyer’s remorse?
When a charity appoints an investment manager it will usually have been through a process of long listing likely candidates and asking them to complete a proposal, before inviting a short list of managers to come and present to them in person.
Ask other charities
The future-proofing starts with the long list: ask other charities for recommendations - they will be able to provide views on who they rate and why. Also try to gain an understanding of what different investment managers offer because some will be more suited to your needs than others.
For some charities, using a firm which invests in a fund (a common investment fund or other fund type) might be exactly the right solution; for others a segregated portfolio (i.e. holding direct positions in bonds, equities and funds) will be a better fit. Sometimes five minutes on the telephone, talking through a firm’s offering can save hours of wading through tenders from firms which were never going to be the right fit.
When the proposals come in, an effective way to whittle down the contenders is to think about what really matters to you. Prioritise what are the key requirements for the trustees and officers of the charity. It may be on-line reporting, trustee training, having an investment manager who is readily available to attend meetings, being treated as a "retail" client or being provided with discretionary management. Before you embark on your selection process understand what are the "must haves" and the "nice haves" and mark the proposal accordingly.
It’s pretty much a given that every investment manager shortlisted will tell you they are client centric or focused, the investment solution has been "tailored" for the charity and that all their existing clients love them. Obviously, when charities ask investment managers for two references from existing clients, they are going to be provided with cherry-picked testimonials extolling the virtues of the manager.
To gain a more realistic insight into a firm’s reputation, you are better served by asking for references (if you want them) from other charities before you start the process, rather than at the end.
The manager's responsiveness
"Client centric" or "focused" should be a given. It is more meaningful to establish how responsive a manager is to a client’s requirements and how flexible they are in their service and investment offering. This will come across in how they answer the initial proposal: have they followed the charity’s order of questions or have they simply printed out their stock response?
When it comes to mention of a "tailored" approach, it is essential for charities to understand what is meant by this. If the trustees have decided to appoint a manager "which" is not putting them into a fund, then a key selling point may well have been the idea of a portfolio constructed solely to meet that charity’s requirements.
The world of charity investment management, from a regulatory perspective, looks very different to that of a few years ago. The key regulatory driver behind this is suitability. This means investment managers have to evidence regularly that the investments they have made for a charity are in line with the charity’s investment mandate. Critically, this will include the risk profile. This seems eminently reasonable (and also links into ensuring the Statement of Investment Policy is up to date). However there are, perhaps, unintended consequences.
On the whole, investment managers will look to use an investment framework that enables them to meet the defined risk profile requirements (which will have been set at a house level) by ensuring that portfolios which have the same risk profile as one another also exhibit a reasonable degree of commonality between one another, hence "proving" suitability.
This means they will hold similar asset allocations and underlying investment positions at the core, and then the investment manager will tailor the remaining to ensure the charity’s specific mandate is met, including asset allocation ranges, income requirements and any ethical considerations.
This is not a bad thing from either perspective. It means the manager is investing in a reasonably sized list of holdings which they know well; rather than a potentially longer list which might have a long tail of small positions which are "forgotten". In addition, this approach ensures the manager meets another regulatory requirement, that of "treating customers fairly".
So how is this investment policy defined? It all starts and ends with the charity’s objectives – what is the strategic plan for the next five to ten years? This should be the template for the investment strategy. The ability of the investment manager to translate the charity’s plans into an investment strategy in a coherent fashion should be a deciding factor when the trustees review proposals and the existing relationship.
Common ingredient
There does not appear to be a secret formula enshrining what a charity wants from its investments or managers. However, there is always one common ingredient - trust. A bit of integrity goes a long way.
Consider the way in which your investment manager behaves if an issue is raised with them. Think about how you feel if something is wrong and the person you raise this with, immediately apologises and owns the mistake. Contrast this with a person who tries to brush over the error or passes the blame on. Trustees are humans too and are bound not to appreciate an investment manager who starts spewing technical jargon such as EBITDAs, WACCs and ROICs when questioned about an underperforming investment.
If the future-proofing has not worked and the charity is perhaps a couple of years into the relationship (hopefully not just a few weeks) and senses the manager is not quite living up to the initial billing and feels let down, the first question to ask is: has anything changed? Look at the three Ps: People, Performance and Perception.
PEOPLE. It is possible there has been a change in the trustee group; or at the investment manager. The chemistry on a committee (of any kind – not just charities) is fascinating. A change in a key member of the committee may significantly change the dynamic at meetings and the relationship with the investment manager.
The new member(s) of the committee may have different approaches or views, and the actual shape of the committee in terms of its thinking may have changed as a result. If this is the case, and a sense of unease is breeding amongst the trustees then it is perhaps worth getting together and exploring what has changed.
If the representative from the investment manager or support team has changed then it takes time for a relationship to develop and the charity may be uncomfortable with a new person depending on the circumstances.
PERFORMANCE. I have absolute sympathy for a charity which is concerned the investment manager is not performing well, and is agitated that the investment manager is set on a particular course of action. Nerves of steel may be required especially if at the outset the manager has emphasised a 3-5 year investment plan. However, if the charity has appointed the investment manager to manage its funds and if it has done so on a discretionary basis (which is usual), then the old saying comes to mind: "you don’t keep a dog and bark yourself".
At this point it is worth comparing the performance of the charity’s fund against peer group measures to ensure that for the same level of risk the trustees’ expectations are realistic. If the charity’s concern translates into "we have lost all trust in this investment manager", it needs to take a different course of action. It should review what it requires from its investments and seek another steward of these.
PERCEPTION. The charity may feel it is receiving poor service. It may be that the more senior representative from the investment manager has not attended a meeting recently, emails or telephone calls are not being responded to in a timely fashion, or it feels it is just not being listened to. So what to do?
Discontented grumbling
Often there is discontented grumbling but no concerted effort to tell the investment manager that it is just not up to scratch and to lay down the rules in terms of what the charity requires. Speak up. Again, how the manager reacts to your concerns will enable you to conclude whether further action is required.
Remember the charity is the client. It absolutely has the ability to take its custom elsewhere if it feels that it is not getting the service or performance it believes it should receive. The trustees also have a legal obligation to ensure they continue to receive appropriate advice.
