Money manager checkup

Many investors don’t know where to start when it comes time to sit down with their manager or adviser to review their investment portfolio and determine if it is being properly managed.

As a result, near- term performance often becomes the deciding factor in judging a money manager, which may encourage return- chasing and excessive risk being taken at the wrong time.

As part of our Outsourced Chief Investment Officer services, we have come across many different types of portfolios and investment managers and have come up with five questions to con- sider when undertaking an annual review.

❚ Do you have a well-defined and regularly updated investment policy statement?

The investment policy statement is a very important document that protects your portfolio from being mismanaged.

A lot of time and effort should go into setting up and maintaining this statement since it defines your ability and willingness to take on risk, thereby setting out your portfolio’s composition between various asset classes ( i. e., stocks, bonds, cash) with minimum and maximum allocations.

Be sure to compare your portfolio’s c omposition against what was determined in your statement.

For example, if the statement has a maximum equity weighting of 60 per cent and your weight is 80 per cent, you are taking way too much risk and your adviser is doing a very poor job of overseeing your portfolio.

A good manager or adviser recognizes the importance of having an investment policy statement in managing your money and will have one regardless of whether they are required to or not.

It is an immediate red flag if you do not have a well-defined one or if it is not regularly updated on an annual basis at the very least.

❚ What does your portfolio look like?

Over the years we’ve come across some poorly run and outright dangerous portfolios, including ones with highly concentrated portfolios in rate-reset preferred shares, high- yield bonds, energy stocks and speculative private- sector investments, all of which have experienced large losses in the past few years.

A proper portfolio should be well diversified between sectors and even geographical regions. That said, one can take it too far, as we’ve also seen portfolios with more than 400 holdings, which is a logistical nightmare for tracking and maintenance.

❚ What is your investment manager’s investment philosophy and process?

There are as many different styles of investment managers as there are different money- managing philosophies. It’s important to know your manager’s investment process and if he or she is executing according to plan through all market environments.

An immediate red flag is when managers or advisers suddenly switch their process and/or philosophy that they claim to have built an expertise in over the years.

❚ What are your return objectives and how is your manager performing?

A good adviser or investment manager will help derive a reasonable return objective that considers the market conditions at the time. For example, 2016 return expectations should match the recent volatility in equity markets and ultralow bond yields.

The next step is to compare the performance of managers to their strategy or investment philosophy. This means that a manager promising to outperform a benchmark — otherwise known as generating alpha — should not be compared to a manager targeting a risk- managed or absolute return.

But don’t be too focused on near- term performance in your review, unless there is a major discrepancy to the benchmarks.

❚ How much are you paying?

Many investors do not realize that the more money they have under management, the less in fees they should be paying.

Worse, is that a l ot of these fees can be hidden and embedded in the investments being owned.

One of our most common recommendations for enhanced performance is to negotiate a fee reduction.

This reduction in fees is often quite sizable. We’ve come across some portfolios worth more than $ 25 million being charged over 1.5 per cent in fees, something that can easily be cut in half or even two-thirds, resulting in savings of hundreds of thousands of dollars per year.