When sacking a manager, it comes down to taking a pragmatic approach that examines whether they are delivering on the principles they claim to follow, rather than focusing on performance or fees.
Evidentia Group chief investment strategist Nathan Lim, who retired at the end of last year, said when running a multi-manager portfolio, selecting a manager comes down to whether the manager is staying true to their approach.
“It’s easy, in my mind,” Lim told the Professional Planner Shape of Advice Podcast.
“Are they delivering against their objectives… and are they doing it the way they said they were going to do it? There’s always going to be periods of time where through market stress, they might be struggling… but as long as they’re staying true [to their] approach and not simply changing their spots when it suits them, we’re okay with that.”
Apt Wealth Partners CIO Sarah Gonzalez said this approach also applied to passive managers, not just active investors.
“The key aspects that you’re looking at [are] people, process, portfolio construction, risk management,” Gonzalez said.
Vanguard Australia head of multi-asset Matt Cho said a common mistake is having too many managers in a portfolio, “which can create ‘de-worse-ification’ as it’s sometimes called”.
“And not even having too many managers, but managers where there’s overlap,” Cho said.
“If you’re picking a core-style Aussie equity active manager and you’re pairing that with an Australian equities index, you not necessarily getting the best bang for buck in terms of utilising your fee budget.”
The panel said managers should not be dismissed as viable options just because they charge high fees. Lim said it boils down to value for money.
“We don’t mind managers earning a fee, that is their job, as long as they can justify it by demonstrating consistently that they earn it,” Lim said.
“High fees are not necessarily a bad thing – high fees that lead to massive underperformance is a bad thing, so that’s what we’re trying to avoid.”
Cho said Vanguard’s philosophy isn’t that they are anti-active management, but anti “paying too much” for active management or poor performance.
“Vanguard has a focus on low cost,” he said. “Every dollar that you’re paying in fees is $1 that’s not compounding for your return.
“But if an active manager is giving you net benefit in excess of those fees and justifying the fees that they’re charging the can play a role in a portfolio.”
Gonzalez said the advantage of a core/satellite structure is that the core position will generally be the lower cost option.
“The managers that you select in that active space that are charging those fees, we don’t mind paying those fees as long as they’re achieving the objectives and the returns that they’re stated to achieve,” Gonzalez said.
These managers typically make part of the satellite sleeve in a core/satellite approach and Lim said they are best used when they are complementing, rather than overlapping, each other.
“The best example I can think of [is] just here in Australia, where we know it is very much large–cap dominated,” Lim said.
“It’s dominated by the banks, by the resource [sector], but surprise, surprise the Australian economy isn’t just a mine located next door to a bank. There’s more to it. You want to be looking for satellites that compliment that core, large–cap bank/resource exposure.”
Cho said the satellite sleeve was about more than just alpha generation, noting an important function can be to meet certain client goals.
“Historically, people have thought about satellites being all about generating excess return and really it’s about getting exposures that you’re not necessarily getting in the core part of your portfolio,” Cho said.
“That could be risk management, downside protection, income production or expressing certain views – it could be ESG tilts, for example.”
Lim said this is where active managers come into play.
“You’re looking for active managers that you’re giving license to market–time,” Lim said.
“I know market timing is always sort of used as a double-edged sword, but the point being is that, through careful selection, you can find active managers that have the ability persistently do the right thing during a crisis or during a period of volatility.”
Gonzalez said a satellite position is to generate a differentiated returns for the firm’s clients.
“So, a different source of alpha generation, but for other clients it might be actually manage risk,” Gonzalez said.
“They might want lower volatility than the overall market, so strategies that actively manage volatility. That’s also what clients look for in that satellite sleeve.”
