Page 9 - FWP Wealth Adviser Newsletter - May 2025

ISSUE 111
MAY 2025

Trust is built on alignment of interests. Investors should seek
managers who invest alongside their clients, maintain transparent
communication, and prioritise client outcomes over asset gathering.

benchmarks. The CFA Institute recommends focusing on and aligned with the investor’s own objectives.
risk-adjusted measures such as the Sharpe ratio, alpha, and Firstlinks emphasises that “a clear and consistent invest-
drawdown, which provide a fuller picture of a manager’s ment philosophy is essential”. Managers who can articulate
skill and discipline. their approach, explain their decision-making process, and
demonstrate conviction in their beliefs are more likely to
Beyond the Numbers: Understanding the Context deliver sustainable results. Morningstar adds that “enduring
Performance metrics must be interpreted with care. For business models” and “the ability to attract and retain
example, a manager who outperforms during bull markets talent” are critical indicators of a manager’s long-term
but underperforms in downturns may not offer the resil- viability.
ience investors seek. Morningstar highlights the importance
of “effective capacity management to avoid performance Alignment of Interests and Transparency
drag from excessive fund size”, as large funds can struggle Trust is built on alignment of interests. Investors should
to maintain agility and may be forced to compromise their seek managers who invest alongside their clients, maintain
investment approach. transparent communication, and prioritise client outcomes
Firstlinks points out that “funds that have grown too over asset gathering. The Inside Adviser highlights the
large often lose their edge,” and that “investors should be importance of “alignment between the manager and the
wary of managers who deviate from their stated investment investor,” noting that fee structures, co-investment, and
style or process”. This phenomenon, known as style drift, disclosure practices all play a role in fostering trust.
can signal a loss of discipline or a response to market pres- Behavioural finance research supports the value of
sures rather than a genuine evolution of strategy. qualitative assessment. Studies have shown that trust,
integrity, and cultural fit can be as important as technical
Quantitative Tools and External Frameworks competence in financial relationships. Investors who feel
The science of manager selection is supported by a range confident in their manager’s intentions are more likely to
of quantitative tools and frameworks. The CFA Institute, for remain committed during periods of volatility, reducing the
example, advocates for a structured approach that includes: risk of emotionally driven decisions.
• Analysing performance attribution to determine the
sources of returns Team Stability and Organisational Strength
• Assessing volatility and downside risk A fund’s success often depends on the stability and
• Comparing fees and expenses relative to peers expertise of its investment team. Morningstar points out
• Evaluating consistency in portfolio construction and that “the ability to attract and retain talent” is a hallmark
turnover of high-quality managers. High turnover, frequent organ-
isational changes, or reliance on a single star manager can
By applying these tools, investors can separate skill from undermine performance and increase risk.
luck and identify managers with a repeatable edge. Firstlinks advises investors to “look for stability in the
team and a culture of collaboration”. A well-structured team
The Art: Qualitative Factors, Philosophy, with complementary skills and shared values is better posi-
and Trust tioned to adapt to changing market conditions and sustain
The Intangible Qualities performance over time.
While numbers are indispensable, they do not tell the
whole story. The art of fund manager selection lies in un- Building Resilience: Strategies for
derstanding the people, philosophy, and culture behind the Investors During Crises
returns. As The Inside Adviser notes, “The art of manager The Role of Manager Selection in Financial Resilience
selection is about understanding the people, their motiva- The pandemic, global conflicts, and economic shocks
tions, and their process”. This involves assessing whether have underscored the importance of resilience in investment
the manager’s investment philosophy is clear, consistent, portfolios. Fund manager selection plays a critical role in

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