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Here’s our rundown of the most searching interview questions to ask your fund manager at your next meeting to ensure you understand how they intend to invest your money.
This information is taken from industry best practices – i.e. this is not us making it up but rather it’s what professional managers of pools of capital will ask fund managers. We are ourselves at the receiving end of such questions, and we are basically equipping you to ask the same questions that a pension fund or the manager of an endowment has on their list.
When you invest your money with a fund manager, you need to make sure you do your due diligence (DD) beforehand. This means you have to be sure you understand how they are going to invest your money and that you are comfortable with this.
Of course, private investors go into these meetings with the best intentions, but not all of them are equipped with the right knowledge and experience that will enable them to cut through the noise and focus on what really matters. And how should they be equipped? This is why we are putting into the public domain what generally counts as industry best practices, in a way that private investors can understand and make use of.
With this in mind, we’ve put together a list of questions that will help you forge a deeper relationship with your fund manager, and hopefully leave with a much better understanding of how they intend to manage your money.
What is the fund manager’s background?
How long have they managed money? What institutions have they worked at? If this is the fund manager’s first mandate, what other experience do they have that might suggest they are a good investor? If they managed their own money, is there a fully audited track record rather than just a paper portfolio or a back-calculated model?
What is the strength of the team?
Is this a one-person outfit or is there a team of analysts around the manager? If there is a team, how do they avoid death by committee? If there isn’t, how do they deal with single-man risk? What other experience can they draw on from other people in the business?
What is the typical pool of money that they manage?
Who is the largest investor in the fund by percentage? What is your strategy for coping with large volumes of redemptions? How many funds do you manage?
How is the fund management entity structured?
Who are the main investors in the company? Crucially, does the fund manager have a personal stake in the fund management company (or the fund itself)? What precautions are being taken to ensure that client assets are ringfenced from the fund management company?
What jurisdiction does the company operate under?
Who is the custodian of fund assets? What are the regulatory risks to the company? Was the jurisdiction subject to any black or grey listings in the past and is it likely to be in the future? What is the quality of local institutions?
How does the fund describe its investment style?
Are they value or growth investors? Which investors have they been influenced by the most? They should be able to describe their investment style in plain English – otherwise you may want to ask yourself why this isn’t the case.
What is the fund’s investment process?
This is crucial to understand if you’re going to make sure that you get what it says on the tin. A well-defined investment process is there to protect against style drift (where a fund manager acts outside the parameters of the initial stated investment strategy) and to ensure that investment decisions are made for the right reasons. Is there an investment committee and if so who is that comprised of?
How do you construct the portfolio?
Is there a top-down (sector driven, for example) or bottom-up approach? Are there limits in terms of position sizing? How many positions are typically held and what are the lower and upper thresholds? Does the level of concentration suit the mandate and the investor’s risk profile?
How do you screen opportunities?
What are the stock screening methods in place? Are they qualitative, quantitative or both? Where do you find new opportunities? Do you draw on a network of contacts to provide new ideas? How do they ensure they are not simply copying the same ideas that everyone else is investing in and avoid getting stuck in the herd mentality of the investment industry?
What are your sell disciplines?
Selling is often the hardest part of the investment process. What are the processes in place to ensure that the fund manager remains disciplined when it comes to exiting a position? Is this done over time in a piecemeal manner or is the entire position sold after reaching a price target?
What environment do you typically perform in and struggle?
What are the manager’s strengths and weaknesses? How is the current investing climate suited to the manager’s style and mandate? What challenges does the manager envisage in future? What steps have been taken to address these weaknesses?
What do you look for in a company?
What is the manager’s main area of focus when it comes to stock selection? This could include things like quality of management, a strong balance sheet, turnaround potential, a high growth rate and many other factors. Which criteria are ‘must haves’ and which are optional? Each manager will look for certain characteristics that will determine the type of companies the fund invests in.
What does the research process look like?
How long do you monitor a company before you buy? Do you build positions over time or buy in volume on the back of high conviction? How long is the research process from start to finish? What external research do you use? Do you use sell side brokers or is it all in-house research or a combination of both? Do you engage with management or are you passive? If you do engage with management, what kind of access do you get? Is that important? How many conferences (if any) do you attend?
What is the challenge culture?
Does the fund management company operate a hierarchical or flat organizational structure? Do junior employees feel empowered to challenge the decisions of their superiors? Is there a risk management team sitting above you? Do you run ideas past advisers who might be able to spot errors of judgement pre-emptively?
What is the remuneration structure?
What is the management fee? What is the performance fee? Is there a hurdle rate for the performance fee? Are there any other fees? How is the fund manager remunerated? If fund manager remuneration includes bonus payments, how are these calculated?
This list of questions is by no means exhaustive, and you can never ask too many questions. The best fund managers will always enjoy talking about their work, so you should never be afraid to put them on the spot.
Disclaimer: This blog is intended for informational purposes only. This blog is not intended to invite, induce or encourage any persons to engage in any investment activities and is not a solicitation or an offer to buy or sell any stock, investment product or other financial instruments. If in doubt, please seek financial advice from an independent financial adviser. Sarnia Asset Management is licensed by the Guernsey Financial Services Commission (GFSC). Past performance is not an indication of future returns. Investments carry risk, including the risk that you will not recover the sum that you invested.
By James Faulkner
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