Rogerscasey: 'Terminating Investment Managers Should Not Be Borne From Frustration'

Even those managers that outpace their benchmarks for extended periods of time inevitably suffer missteps, according to a new whitepaper by Rogerscasey.

(January 26, 2012) — Recent investment performance should be only one of several criteria used to determine when to hire or fire a manager, although longer track records should not be ignored, according to a newly released paper by consulting firm Rogerscasey.

According to the report, if a manager is having a lull, it will show up in the periodic performance numbers. However, it is imperative to realize that these statistics represent only single snapshots in time. “As a result, recent underperformance can affect the periodic returns dramatically. More often than not, these relative returns can and will change directionally from quarter to quarter. In many cases, we see the poor performance turn positive in less than four quarters if the manager begins to perform well,” assert the paper’s authors Dave O’Donovan, Jason Bailin, and Nick Catanese. “…We advise clients to make all of their hiring and firing decisions based on a diverse set of qualitative and quantitative factors with an eye on prospects for future performance,” the authors conclude.

The report continues: “Given a pattern of terminating underperforming managers, the result is the continuous realization of underperformance in every asset class, making it nearly impossible for the investor’s portfolio to outperform in the longer term.”

So when should investment managers be terminated?

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While Rogerscasey concludes that its clients should not retain the entirely of its underperforming managing, the decision to terminate should not be made out of frustration, as “it is the job of the consultant to remove emotion from the decision and to present the facts as to why the managers may or may not outperform once again.”

aiCIO explored the hiring and firing of managers in its Fall Issue — posing the question about whether buy lists — which have been developed to track managers’ performance numbers, as well as assets under management, portfolio manager tenure, and style information — are constructed in a fair and reasonable way.

(January 26, 2012) — Proposed financial regulation in Europe could stymie active managers’ investment processes and hit investors’ returns, the UK’s largest trade association for fund managers has warned.

The Investment Management Association (IMA), whose members control €4.7 trillion in client assets, has asked the European Parliament to reconsider how inside information is defined under the Market Abuse Directive (MAD) and suggested an approach closer to that used in the UK.

Guy Sears, director of wholesale at the IMA, told a hearing arranged by the European Parliament’s Economic and Monetary Affairs Committee this week that the proposed legislation could prevent active managers carrying out much of their stock-picking practices.

Traditional, stock-picking fund managers that actively manage their portfolios claim to create outperformance by getting to know the companies they buy rather than just following an index. Although a debate on active versus passive management continues to rage, many believe only active management of securities can create true outperformance or alpha.

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Sears at the IMA said: “The [current] wording in the [MAD] proposal on what is inside information could make it impossible for asset management companies to continue their active management practices, such as meeting with companies in which they invest to perform detailed interviews with senior management and with brokers who follow those companies.”

He said that under the Market Abuse Directive proposal made by the European Commission on 20 October 2011 any information made “available to a reasonable investor, who regularly deals on the market and in the financial instrument or a related spot commodity contract concerned”, would be considered as inside information.

Sears said: “They could never be sure that information disclosed to them during the course of these activities was not ‘relevant to an investor’, and if they traded following such meetings, they could be insider trading.”

Sears added that one way of resolving this discrepancy would be to use the UK’s relevant information not generally available (RINGA) test.

Under the RINGA test, inside information is regarded as that which is “likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position related to the market”.

This story initially appeared in aiCIO’s sister publication The Trade.