Page 9 - FWP Wealth Adviser Newsletter - May 2025
P. 9

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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