Choosing the Right Investment Portfolio Manager
Selecting the appropriate investment portfolio manager can significantly impact your journey toward achieving long-term financial goals. While some individuals may opt to manage their investments independently, the question arises: How do you identify a competent portfolio manager amid a sea of options? Euronews Business delves into the essential qualifications, crucial questions to consider, and effective strategies for assembling a robust investment portfolio.
Why is a Portfolio Manager Important?
Drayton D’Silva, the CEO and Chief Investment Officer at Tower Hills Capital, emphasizes that the interplay between your investments is as critical as the selection of the investments themselves. He states, “The objective for a portfolio should be to create a sufficiently diversified allocation that optimizes risk and returns based on your specific time horizon, while also accommodating your ongoing cash flow and liquidity needs.” Mihail Dobrinov, founder and Chief Information Officer of Trimon Capital, asserts that a well-constructed portfolio must adhere to defined risk parameters to ensure predictable performance.
He elaborates, “Due to the complexities of portfolio mathematics, individual investors may struggle to determine and achieve the optimal asset allocation.” The process of selecting the right stocks, bonds, exchange-traded funds (ETFs), or mutual funds demands specialized knowledge, skill, and access to comprehensive data. A professional portfolio manager can utilize sophisticated software tools to tailor the portfolio’s risk and return profile to align with an investor’s objectives. Additionally, managing an investment portfolio is a dynamic, interactive endeavor.
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Dobrinov further notes that as return expectations, volatility, and correlations among assets evolve over time, the portfolio construction process must adapt accordingly. “Failing to do so may lead to style and asset allocation drifts, rendering the portfolio ill-suited for the investor.” Regular monitoring and rebalancing of portfolios can be a complex and time-consuming task for many investors. Moreover, each portfolio should be benchmarked against a relevant standard to evaluate its performance accurately. Access to the right information, tools, and data is crucial for effective performance assessment,” he adds.
Shawn Carpenter, founder and CEO of Stock Alarm, shares his insights with Euronews: “Investing transcends merely picking stocks. The market is in constant flux, and most individuals do not have the luxury of time to stay abreast of every change. This is where a fund manager proves invaluable—they oversee your investments, enhance your strategy, and make necessary adjustments. Think of them as your personal financial navigators.”
What to Look for When Selecting a Portfolio Manager?
With a plethora of portfolio managers available, how can you choose the right one? Should you prioritize experience or seek someone whose personality and values resonate with your own? The ideal answer often lies in striking a balance between the two. Jacqui Smith, a portfolio manager at Reynders, McVeigh Capital Management, asserts, “Beyond professional credentials, which should be a given, it’s vital to find someone who listens well and comprehends what matters to you—what motivates you, the purpose of your investments, and how your values align with theirs.”
Smith continues, “Considering the substantial life savings that clients entrust to their managers, capital preservation becomes a paramount factor. During the interview process, you can gauge a manager’s performance by requesting their upside-downside capture ratio, which illustrates how their performance stacks up against their benchmark during both positive and negative market conditions. The goal is to identify a manager who typically minimizes losses during market downturns while outperforming in bullish phases.”
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George McNeil, a chartered financial planner at DGS Chartered Financial Planners, emphasizes, “Beyond personal rapport—crucial since you will be in communication with them for years—focus on their experience, track record, and qualifications. Ensure the individual possesses substantial experience and review their past portfolios to assess performance. It’s also essential to verify they hold relevant certifications and safeguards in case of issues.” Portfolio managers are typically required to have certifications such as Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Certified Investment Management Analyst (CIMA), and Financial Risk Manager (FRM). In most cases, a bachelor’s and master’s degree is also necessary. In Europe, they must comply with regulations set by the European Securities and Markets Authority (ESMA), while in the UK, adherence to the Financial Conduct Authority (FCA) guidelines is required, and in the US, compliance with the Securities and Exchange Commission (SEC) is mandatory. Additionally, portfolio managers in the US may need to obtain a license from the Financial Industry Regulatory Authority (FINRA). Key skills for a portfolio manager include risk management, financial analysis, decision-making, communication, and strategic thinking.
Indicators That Suggest You Need to Change Your Portfolio Manager
Even after collaborating with a portfolio manager for several years, there may come a time when returns do not meet expectations. Additionally, mismatched investment management styles or other issues may arise. In such instances, should you consider switching your portfolio manager? Faris Khatib, CEO at Ideal Tax, suggests, “Signs that indicate you should transition to a new portfolio manager include consistent underperformance coupled with a stagnant strategy. A lack of proactive communication can also be a red flag, particularly if they only reach out when issues arise.”
McNeil adds, “While external economic factors are beyond our control, if performance consistently lags during periods of overall economic growth, I recommend scheduling a meeting with your portfolio manager to discuss the situation and seek explanations. Another warning sign is a lack of communication—this relationship should be long-term, as you are entrusting them with your life savings, so proper communication is essential.”
Smith points out that it may be time to reconsider your portfolio manager if you feel they are not adequately listening to you or considering your risk tolerance and investment horizon when structuring your portfolio’s asset allocation. “Understanding the client and their motivations is crucial. If you sense that your portfolio manager has not made an effort to understand you better, it might be time to explore other options. For example, if you are a lung cancer survivor and have investments in tobacco companies, this would be a significant concern.”
Dobrinov suggests that significant portfolio drift in terms of style and asset allocation could warrant seeking a new portfolio manager. Erratic trading patterns and high turnover rates may indicate a lack of discipline and conviction. Additionally, consistently selecting higher-cost ETFs and funds when more affordable alternatives exist could signal trouble. Be vigilant for vague and hidden fees; the best portfolio managers transparently disclose their fee structures, ensuring you know exactly what you are paying.
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How Should a Portfolio Be Constructed?
The construction of a portfolio can vary widely based on an investor’s unique needs, age, capital availability, and investment experience. Steven Kibbel, a certified financial planner at Kibbel Financial Planning, states, “To achieve a balance of risk and return, a well-constructed portfolio typically diversifies across various asset types, including stocks, bonds, real estate, and more. It should reflect your financial goals, investment time horizon, and risk tolerance.” For instance, younger investors may prefer portfolios heavily weighted toward stocks for growth, while those nearing retirement might opt for a more cautious, income-oriented allocation.
McNeil emphasizes, “Though there are various approaches and philosophies, the portfolio should fundamentally align with the client’s risk appetite. A young client with a high risk tolerance and a solid understanding of investments can afford to take on more risk than an older client with limited knowledge.” Furthermore, asset allocation has been shown to drive the majority of investment results over time (reports suggest up to 80%). This involves ‘spreading’ capital across diverse assets and geographies, allowing investors to capitalize on the global economy’s returns. “While portfolio managers may take positions based on their projections, it is essential to maintain a diversified approach across different regions (such as the US, UK, and EU) and asset classes (such as equities, property, and fixed income),” he adds.
Ultimately, McNeil concludes, a client should fully comprehend their portfolio; it must be logical and clear, or it fails in its purpose.
Disclaimer: This information does not constitute financial advice. Always conduct your own research to ensure it aligns with your specific circumstances. Please remember that we are a journalistic platform aiming to provide the best guides, tips, and advice from experts. Relying on the information presented here is undertaken at your own risk.