A CIO’s Perspective on Choosing an Investment Manager

I am often asked whether an investor should use active or passive management.  I think that is the wrong place to start and a better first question would be: what must the investments achieve?  The answer determines the type of service and portfolio required and can narrow the available choices quickly.

Only then is it possible to decide whether an active or passive approach is more appropriate.  This series sets out how I would approach that decision and then go on to select an active manager if that is deemed the preferred approach.  It is not intended to argue that one model is universally better than another.

Passive versus Active

A passive fund is designed to replicate the return of a market at low cost, without the fund manager making individual investment selections.  Passive portfolios are generally cheap, transparent and easy to explain, and have often outperformed active counterparts in the same markets.  Where the chosen index is consistent with the client’s objective, this can be an excellent solution.

By design, however, a passive fund is indifferent to the person who owns it.  It does not know whether its holder is 35 and seeking growth, or 85 and drawing an income.  It cannot reflect individual preferences, explain a particular holding or adjust when the client’s objective changes.

Do I Need a Human?

A client who is comfortable selecting and monitoring passive funds may not need an investment manager.  Low-cost platforms make this straightforward, while robo-advisers and managed portfolio services can select and monitor investments within an agreed risk tolerance may further reduce the input required from the client compared with selecting passive funds directly.  However, they still offer limited scope for individual influence or bespoke support.

Where the portfolio must do more, human judgement may add value although it will also add cost.  An investment manager can help with:

• Determining if the investment objective is feasible or needs to be revised.

• Helping the client understand their own ability and willingness to take investment risk.

• Deciding which assets belong in an ISA, which in a pension and which in a general account is a decision that can be revisited year after year as allowances, rules and circumstances change.

• Building around a constraint: a concentrated legacy shareholding, a holding which cannot be sold for tax or professional reasons, an ethical exclusion or a need for a particular income pattern rarely fits a model.

• Explaining what is owned: some clients want to understand their investments or help the next generation to learn.  A manager can relate those explanations to the client’s own holdings and circumstances.

• Noticing change: a manager who speaks to a client regularly may be the first to hear about a business sale, inheritance, illness or divorce, and can identify when a conversation with a specialist would be worthwhile.

None of these benefits depends on outperforming a benchmark.  They are about fitting a portfolio to a person rather than making the person fit an existing portfolio; it’s also worth noting that this custom portfolio can still hold passive investments within it.  If human assistance is required, I would therefore focus less on who promises the highest return and more on who can help the client achieve the broader objective.

The Honest Comparison

The fair comparison is therefore not simply between passive and active returns. It is between a passive portfolio, together with the decisions the client and their professional advisers must make, and a managed portfolio in which some of those decisions form part of the service.  For a client with straightforward needs, the former may be the better answer.  For a client with several accounts, changing tax circumstances, important constraints or a family which wants to be involved, the latter may justify its additional cost. 

Questions Worth Asking

• What does the client need the money to achieve?

• Does the portfolio need to do more than deliver market exposure?

• Who, in practice, will make the decisions a passive portfolio cannot answer?

• What would professional assistance save the client in time, tax or missed opportunity?

CDAJ

Risk Warning & Disclaimer

This article is provided for general information purposes only and is not intended to constitute investment advice, investment research, or a personal recommendation. It does not take into account the investment objectives, financial situation, or particular needs of any individual or entity.

The views expressed are those of the author as at the date of publication and are subject to change without notice. The material is the original work of the author. It may not be copied, reproduced, distributed or presented as the work of another person without his prior written consent.

References to investment concepts, asset classes, or portfolio construction approaches are included for illustrative purposes only and should not be construed as a recommendation or a solicitation to buy or sell any security or financial instrument.

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The value of investments and any income derived from them may fall as well as rise, and investors may receive back less than they originally invested. Past performance is not a reliable indicator of future results. Where investments involve overseas assets, returns may be affected by movements in exchange rates.

Ptarmigan Capital Limited is an employee-owned investment management firm providing discretionary investment management services to private clients, trusts, charities, and family offices. This article is intended to explain the firm’s perspective on bespoke investment management and the factors some clients consider when choosing such an approach. It does not relate to any specific investment product or strategy.

Ptarmigan Capital Limited is authorised and regulated by the Financial Conduct Authority (FRN 940407). Registered in England and Wales (Company No. 12715470). Registered office: 17 Cavendish Square, London W1G 0PH.