The need to review investment managers

The Charity Commission’s guidance, Charities and Investment matters (CC14), is clear. Trustees have a duty of care and are responsible for “reviewing the suitability and performance of investment managers regularly”.

Unhelpfully the Commission does not provide guidance on what “regularly” means. Some trustees think an annual review of performance is enough. However, few carry out formal reviews or investigate alternatives on a systematic or regular basis and, by not formally reviewing and recording their review findings, many trustees are arguably not fulfilling their duty of care.

This is understandable. As trustees we are only human. Therefore, we sometimes try harder to find reasons to avoid carrying out tasks rather than find the energy and will to carry them through. Sadly, it is why we do not review our investment managers as frequently as we should.

However, this need not necessarily be a chore. Taking the time to review your existing manager and indeed meeting with other managers can introduce new thinking and ideas. If you do not know what questions to ask, my suggested top six would be:

  1. Are they delivering the required return?
  2. Are you happy with the level of service you are receiving?
  3. Are their fees competitive?
  4. Are the people you deal with and the investment style the same as when you appointed them?
  5. Is their investment style still suitable for your charity?
  6. Are your investment returns as good as or better than those achieved by other investment managers for a similar brief?

Duty of care

If the answer to any of these questions is no, then it is not just a matter of prudence and good practice to look at alternatives; it is your duty of care. So, what answers should you be looking for?

ARE THEY DELIVERING THE REQUIRED RETURN? You need to be happy about the sort of returns you are receiving and that your investment manager has the right target to aim for.

This target should be what you need (inflation plus 3% for example) rather than a notional figure based on the initial asset allocation they suggested would meet that target.

A benchmark, a typical performance measure used by many managers, only shows you whether your manager has added value by making changes to your portfolio, not whether they have met your needs.

ARE YOU HAPPY WITH THE LEVEL OF SERVICE YOU ARE RECEIVING? You should be receiving all the information you need to fulfil your duties as trustees. Reports and valuations should be easily understood, so you can clearly understand how your portfolio has performed. Payments should happen smoothly and you should be provided with a suitable year end summary to ensure you avoid substantial costs in preparing your annual return.

Your investment manager should also report to you in person when you need it. Ideally, as a trustee, you should meet with your investment manager, or a member of his team, at least annually, and with a portfolio above £1m at least twice a year. If for any reason they are reluctant to do so, this should give you cause to look for alternatives.

ARE THEIR FEES COMPETITIVE? “The labourer is worthy of his hire” but fees for charity portfolios are under pressure. If your current manager was pitching for your portfolio again today, he might propose a different fee rate.

Competitive rate

It is worth looking at other companies’ fee structures or the published surveys in magazines to get an idea of the sort of range you should expect. Your manager should be offering you a competitive rate.

ARE THE PEOPLE YOU DEAL WITH AND THE INVESTMENT STYLE THE SAME AS WHEN YOU APPOINTED THEM? People move jobs but personal chemistry is important. You should have met whoever is responsible for your account and be reassured they are following the same investment process they pitched to you when you appointed them.

More than one change should prompt a closer look and a change of process suggests you are dealing with a different animal to the one you appointed.

IS THEIR INVESTMENT STYLE STILL SUITABLE FOR YOUR CHARITY? An investment manager may be good at taking advantage of strong markets but, are they good at protecting value when markets fall for example? The whole point of reviewing suitability is to ensure the trustees have “the right horse for the course”.

Many investment managers are focused on achieving good “relative” returns. In other words, they agree a benchmark and focus on add value by trying to outperform it. If it falls by 20% in a year they will be happy to return -18%. Will you be as happy?

If this isn’t what you want, you need a different type of investment manager.

When poor markets

An alternative is to focus on delivering against a target. This can be cash + or inflation +. Both strategies will try to protect assets in poor markets to achieve this, rather than outperform indexes.

ARE YOUR INVESTMENT RETURNS AS GOOD OR BETTER THAN THOSE ACHIEVED BY OTHER INVESTMENT MANAGERS FOR A SIMILAR BRIEF? You cannot judge whether you have the best or the right manager unless you know what the alternatives are. Your manager may have been the best when you chose them, but are they the best now? Peer group comparisons help, so long as you are comparing ‘like with like’. Ask for how they have done against the relevant ARC Charity Index and what their ranking was. If they are behind, or ranked below the 50%, other managers have been doing better.

You do not have to change investment managers as a result of the review. However, a reviews can often reinvigorate a relationship, refocus attention and occasionally lead to a reduction in costs. Therefore, it can be good for both sides of the relationship.


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