Summer 2006

Weighing Investment Manager Success: Attributes of successful investment management firms

Author: Jayson Davidson, CFA, Consultant, Arnerich Massena & Associates, Inc.

Are you choosing investment options for your retirement plan based solely on past performance? Historical investment performance can be deceiving. Longterm average returns may be influenced by short bursts of significant over- or underperformance. While strong historical performance versus peers and benchmarks is an important piece of the puzzle, there are some additional qualities you may want to consider when selecting investment options for your plan: consistent investment strategy, retention of key employees, and alignment of interest.

Consistent Strategy
A desirable investment management team implements and maintains a clear and defined investment philosophy and process regardless of market rotations. Most asset classes and investment strategies rotate in and out of favor. A consistent investment strategy, rather than one that moves with market changes, allows investors to use the fund when building a well-diversified, long-term portfolio.

Retention of Key Employees
Active stock picking relies heavily on the talent and experience of the analysts and portfolio managers. Low turnover in the management team can help ensure that the philosophy, process, and strategy remain consistent.

Alignment of Interest
Successful investment management teams tend to be those that have a vested interest in the future performance of their fund. If team members have a stake in the outcome, it is usually a good indication that their interests are aligned with that of the shareholders. For example, many firms are keenly aware of the potentially damaging effects of rapid asset growth and/or a bloated asset base. This can lead to a divergence in the philosophy and process, and possibly to a dilution of returns. Managers who have an ownership stake in the firm are usually more likely to preserve the integrity of the strategy by managing asset growth and capping the fund size.

When choosing investment options, it is always important to revisit the old adage, “past performance is not indicative of future results.” Investing in funds that have a history of strong performance is important, but you may also want to consider factors such as consistent strategy, tenure and retention of the management team, and their alignment of interest with shareholders. These qualities can help drive the future success of the fund.