How to choose an investment manager

For financial advisers looking to provide the best possible advice to their clients, the challenges are manifold. With so many investment managers spruiking their wares, all offering extensive information about their investment processes, sorting the wheat from the chaff can be no mean feat.

So what should advisers be looking at when it comes to making a choice?

The first step is to understand your client’s investment objectives and timeframe. This will enable you to structure their portfolio in line with their stage of life and return objectives. This in itself requires time and consideration.

However, once the decision on optimum portfolio structure and the division between asset classes is made, there remains the question of which fund manager to choose within each asset class.

Investors are naturally focused on performance, which is to be expected. It’s certainly true that strong performance can provide hard evidence of a robust investment process. But by the same token, the reason investment managers are obliged to tell investors that “past performance is no guarantee of future performance”, is that it’s true.

In fact, the best predictor of future performance is the quality of the investment process which enabled the investment manager to perform in the first place. If this process is robust and consistent, it is safe to say that you can have more comfort that the manager you choose is likely to continue to perform.

A number of managers offer different processes that are characterised by consistency and a robust approach, but I would like to offer Hyperion’s investment philosophy as an example.

As specialists in Australian equities we are not diverted by the promise of gains from other asset classes, but stick to our field of specialty. And, because we invest for the long term, we avoid the occasional temptation of shorter term trades. We have chosen – and committed our clients – to an investment process that identifies high-quality companies with long-term sustainability because we believe that these are the companies that can produce the best long-term returns for our clients.

As a bottom-up, fundamentals-based investor, we don’t apply a sector-specific approach, but rather a focus on quality companies regardless of sector, which experience tells us is a sounder approach.

If you’re an adviser on the hunt for an investment manager with a sound process, look for evidence of this kind of consistency. It can be easy – especially when performance dips as it can from time to time in line with the investment cycle – for an investment manager to lose resolve and opt for different plays to earn a short term gain.

However, experience tells us that often yielding to that short term temptation is at the expense of long term gains. And, in Hyperion’s case at least, that’s what we’re committed to delivering.

Look also for a structured process. For example, Hyperion starts by assessing a company’s addressable market over a ten-year period, which means looking at the sector as a whole. If the sector is growing and the company is small relative to the market, that can be a sign of organic growth potential, which can spell better returns over time.

Some examples of companies that have realised this growth potential include online businesses REA Group, SEEK and Carsales.com, in which we are currently invested. All operate in a growing sector and all have been an important part of the Hyperion portfolio for long enough for our investors to have realised benefits from their strong growth over time.

If an investment manager is following a specific process – and sticking to it – this should be evident from its portfolio. So if you’re an adviser seeking reassurance about this, look for common themes that work as proof points for the manager’s claims.

Again using Hyperion as an example, what an adviser can see from looking at our holdings is a concentrated portfolio of Australian stocks that have to consistently earn and maintain their position in the portfolio by adhering to our strict quality criteria.

By that, I mean that we are not influenced by market sentiment or index weightings, but choose instead to make decisions based on fundamentals and in-depth analysis.

In addition, advisers should look for evidence from duration of holdings – be they short or long – as evidence of a manager’s commitment to its stated investment approach. As long term investors, we hold our stocks for an average of eight years.

Another hallmark of strong management is what we call ‘skin in the game’. Does the investment manager invest in its own funds? Having its interests aligned with those of its investors through exclusive co-investment – as we do at Hyperion – can be the ultimate test of a manager’s self-belief.

What all this comes down to is the most important point. Fund managers must do what they say they do. And it is incumbent on investors and advisors to do their research and look at the fund manager’s investment decisions to determine whether they are in line with its stated investment process.

Which brings us to the big question: is one investment process, fund or fund manager better than another?
The answer? It depends. Large funds are not intrinsically better or worse performers than smaller ones, they’re simply different.

The point is, when it comes to investing, one size doesn’t fit all: it’s about choosing different funds and strategies to meet different objectives. Which means knowing what those objectives are in the first place is the best place to start.

About Tim Samway

Tim Samway is the Managing Director and one of the founding partners of Australian boutique fund manager, Hyperion Asset Management.

Over the last thirteen years Tim has played a crucial role in growing the Hyperion business into a recognised Australian equities manager with clients ranging from private individuals to the largest super funds in Australia.

Previously he held positions with investment group Wilson HTM as the Divisional Director of its Wealth Management business and was the General Manager of Wilson HTM for over five years.