Judging your charity’s investment manager
One of the most important financial responsibilities trustees have is appointing an investment manager, yet deciding whether that appointment continues to be the right one is often much less straightforward. Investment returns naturally attract most of the attention, but judging an investment manager is about considerably more than comparing one performance number with another.
A period of underperformance doesn’t necessarily mean the manager has failed, just as a period of outperformance doesn’t necessarily prove they’ve succeeded. The real challenge is understanding the difference.
Performance matters deeply. Trustees have every right to expect an investment manager to deliver on the objectives they set out when they were appointed. The difficulty lies in deciding over what period that judgment should be made. Is one disappointing year enough? What about two? Or should trustees take a much longer view?
The real danger isn’t giving an investment manager too much time. More often, it’s making a long-term decision based on short-term evidence.
For most charities, a period of around five years is a much more meaningful timeframe. That’s broadly a full market cycle and, more importantly, it’s usually long enough for an investment approach to encounter very different market conditions.
A manager who only performs well when one particular style is in favour likely isn’t demonstrating skill, they’re benefiting from circumstance. Equally, a good manager can look distinctly average for a period when their investment philosophy falls temporarily out of favour.
That doesn’t mean trustees should simply stop paying attention until the five-year anniversary arrives. Performance should be reviewed regularly, questions should be asked and managers should absolutely be expected to explain what’s happening. The difference is that those conversations should be about understanding what’s driving returns, rather than deciding whether one difficult year automatically means it’s time to start looking elsewhere.
Measuring against a benchmark
Before looking at whether a manager has outperformed or underperformed, it’s worth asking a more fundamental question: are they actually being measured against the right benchmark?
It’s surprising how often this gets overlooked. Comparing a cautious charity portfolio with the MSCI World is rather like wondering why your labrador isn’t winning the Grand National. They’re simply not trying to do the same thing.
A benchmark should reflect the charity’s objectives, its appetite for risk and the constraints placed on the portfolio. If trustees have asked for a diversified portfolio with lower volatility, a dependable level of income or a more cautious approach to risk, it’s unrealistic to expect returns to mirror an index that’s almost entirely invested in global equities.
For charities in particular, peer group measures such as the ARC Charity Indices can provide a useful point of reference because they compare a portfolio against the real-world performance of other discretionary charity portfolios with a similar level of risk, rather than against a broad market index that may bear little resemblance to the charity’s investment strategy.
Used alongside an appropriate strategic benchmark, peer group measures can help trustees understand whether a manager is genuinely adding value or simply investing under different constraints.
Influences on performance
You have to ask yourself whether your own decisions have influenced performance. Investment managers don’t operate in a vacuum. They’re investing within the framework trustees have set for them, and that framework has become increasingly complex over recent years.
Many charities have introduced ethical investment policies, excluded particular sectors, reduced exposure to fossil fuels or placed tighter restrictions on investment risk. Others have prioritised income over capital growth or adopted a more defensive strategy because they anticipate drawing on their investments over the coming years.
Imagine two charities with almost identical portfolios. One excludes energy and defence companies because of its investment policy, while the other doesn’t. During a period when those sectors perform particularly well, the second charity is likely to produce stronger returns. That doesn’t necessarily mean its investment manager has done a better job, they were simply working under different constraints.
The more useful question isn’t whether those restrictions have affected performance, as they most likely will have; it’s whether the manager has implemented them as effectively as possible.
Not chasing yesterday’s winner
There’s a natural temptation to compare your manager with whoever happens to be sitting at the top of the performance tables today. It’s understandable, but it’s also one of the easiest ways to make a poor long-term decision.
Investment styles move in and out of favour, sometimes for years at a time. A manager who has produced exceptional returns over the last five years may simply have been investing in exactly the parts of the market that have performed best. By the time trustees decide to appoint them, markets have an awkward habit of changing direction.
Replacing an investment manager simply because another has recently performed better is often little more than buying yesterday’s winner. Unfortunately, markets have an equally awkward habit of rewarding yesterday’s disappointment just after investors have lost patience.
Only part of the picture
While performance should always remain at the heart of any review, it should never be viewed in isolation.
Trustees aren’t simply buying investment returns. They’re placing responsibility for often substantial charitable assets in somebody else’s hands, and with that comes an expectation of trust, communication and accountability.
Does the manager explain difficult periods clearly, or do meetings become an exercise in deciphering investment jargon? Are reports written in a way trustees can genuinely understand? Do they proactively communicate when markets become unsettled, or do they only appear when it’s time for the quarterly review? Is there continuity within the investment team and does the portfolio still reflect the philosophy trustees originally signed up to?
Those questions rarely appear in a performance table, yet they’re often the factors that determine whether trustees retain confidence during more challenging periods.
Fees deserve exactly the same scrutiny. The cheapest manager isn’t automatically the best value, but equally, a higher fee should only be justified by a demonstrably higher level of skill, service or both. A manager charging less but consistently underperforming, communicating poorly and requiring trustees to do much of the governance themselves may ultimately prove more expensive than one charging a little more whilst providing genuine long-term value.
Question that matters most
Perhaps the simplest governance question trustees can ask themselves is this: knowing everything we know today, would we appoint this manager again?
It’s a surprisingly revealing exercise because it forces the discussion beyond the last twelve months of performance. If the answer is yes, then one disappointing year probably isn’t enough to justify making a change. If the answer is no, it’s unlikely that performance alone is responsible.
That’s why it’s helpful to distinguish between ongoing monitoring and periodic strategic review. Performance should be scrutinised continuously, but every five years or so it’s worth stepping back and asking some much broader questions.
Is the benchmark still appropriate? Have the charity’s objectives or spending requirements changed? Have additional investment restrictions altered the opportunity set? And, ultimately, is this still the manager the trustees would choose if they were making the appointment today?
Good governance doesn’t mean changing investment managers every five years. Equally, it doesn’t mean leaving them in place indefinitely because nobody wants an awkward conversation. The healthiest charities tend to do something in between. They challenge constructively, they review thoughtfully, and they recognise that successful long-term investing has never been about finding the manager with the best-looking number over the last twelve months.
It’s about finding one whose investment philosophy remains sound, whose communication continues to inspire confidence, and who still deserves to be managing the charity’s assets for the next decade, not simply because of the last one.
