Are You Looking For An Active Manager? Evaluate These 5 Things
You have decided to work with an active manager and must now sort through many investment management firms to select one who is best suited to meet your personalized portfolio objectives. Selecting your active manager is an important task—here are 5 things to evaluate.
1. Active Investment Management Firm
Many investment firms describe themselves as active managers, yet are they really active managers or do they simply invest based on what is included in their benchmark index but at slightly different weighting (also known as closet indexing)? To determine if an investment manager is truly active in their approach, you can look at the manager’s Active Share, which is a percentage measure of how the stock holdings in a manager’s portfolio differ from those in the benchmark index. We believe that a high Active Share enables a portfolio to take advantage of upside opportunities and protect against downside risk very distinctly in comparison to the great number of less active managers with performance that closely follows the benchmark.
Each active investment management firm is unique—with its own history, leadership, experience across different types of clients, and investment approach to managing clients’ wealth. Once you have separated the active investment managers from the passive, you should ensure that your active manager is registered and that their registration category fits with your personalized portfolio objectives. In Ontario, any business that advises clients on investment matters or deals in securities must be registered with the Ontario Securities Commission (OSC), unless it has an exemption.
2. Active Investment Approach and Style
Active managers employ different investment approaches and styles to meet clients’ financial objectives. Differences include, but are not limited to:
- Investment analysis approach: for example, the manager may use a bottom-up or top-down approach to analyzing investments.
- Investing style: for example, the manager may adopt a style such as value, growth or momentum, or a combination of styles.
- Portfolio specialization: for example, a manager may specialize in certain types of portfolios such as those that focus on income strategies to generate stable and dependable income with an opportunity for capital appreciation.
- Portfolio type: for example, the manager may invest all clients’ money in pooled funds or take a more individualized approach with segregated portfolios catering specifically to each individual client’s objectives and constraints.
To invest with confidence, ensure that you understand and are aligned with your particular active manager’s investment approach and style, so that you have complete trust in them.
3. Active Portfolio Performance
Consistent performance is often the result of the disciplined application of an active investment firm’s investment approach and style. Performance should be evaluated by assessing the combination of return and risk: portfolios can be constructed with the intention to have downside protection—meaning that when you look for an active investment manager to not only build but also protect your wealth, maximizing immediate gains should not be the sole objective.
4. Payment For Active Portfolio Management Service
The goal of an active portfolio manager is to execute a strategy delivering a different experience than investing in to the overall market, either to outperform, reduce risk, or achieve a particular goal such as producing income, while taking the investor’s financial objectives, risk tolerance and time horizon into consideration. This process involves quantitative investment analysis, qualitative research, economic forecasts, and personal judgement based on a wealth of experience.
As a result, fees for active portfolio management services vary across investment management firms because approaches and style are different—the portfolio is not the same “product” across clients and across investment management firms.
Lastly, to invest with confidence, you need to ensure that you have complete trust that your active manager and their team are acting in your best interests to achieve your personal goals. You should meet with the professionals involved in the management of your portfolio to ensure there is a good fit on a personal level, which will enhance that sense of trust.
Bloom Investment Counsel, Inc. is a well-established Toronto-based independent, privately-owned boutique investment management firm providing customized, actively managed, Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.
Founded in 1985, Bloom has experience in managing in excess of $2.5B in assets over the years. We believe that generating independent cash flow is central to the success of our clients’ portfolios because it provides capital for the present day, if needed, while continuing to preserve and build wealth for the future.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.