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

(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? 

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.