The rationale for investment manager changes

Sometimes we have to change the investments we hold in our clients’ portfolios. We’ve talked about rebalancing and tax loss harvesting as ways to keep portfolios’ allocation in check and lower tax bills, but what happens when a specific investment manager of a mutual fund or other vehicles needs a change? How do we decide when to hire or fire managers within our client portfolios? The Advisory Group’s Investment Committee follows a careful and disciplined process, drawing upon internal and external research to make this rare, but important, decision.

How we hire investment managers

Hiring involves an institutional-style assessment that considers an array of quantitative and qualitative factors. Along with a manager’s stand-alone merits, we also consider the “manager structure,” or how an investment fits with other vehicles to serve the overall portfolio design goals. We consider the taxable or tax-deferred status of the portfolio as an additional measure.

An intensive research process allows us to select managers in which we have high confidence regarding their long-term capabilities, based on their people, process and performance. As a result, manager changes are not frequent.

When we replace investment managers

Eventually, however, manager replacements are necessary, and are generally driven by concerns regarding the same three P’s above:

1. People: Organizational changes, such as key personnel departures
2. Process: Significant investment philosophy or procedural changes, causing the manager’s results to behave differently than desired
3. Performance: While studies and our experience show that the best managers all have significant periods of weakness on the road to good results, and premature removal of a manager can harm performance, persistent and/or unexplainable under-performance relative to the fund’s peers and benchmark can necessitate a change.

While our manager research process is process-based, it intentionally avoids hard pre-established rules for hiring and firing. There is both science and art in the manager research process. Our experience and outside research shows that judgement is important to better long-term outcomes.

If you have questions about this process and how it affects your portfolio, please contact your advisor.