Mercer has produced a fund manager interrogation list for wholesale investors looking to build due diligence skills.
In a recent article, Garth Gregory, Mercer NZ investment consultant lays out the seven key questions trustees and others should ask to tease out more qualitative detail from current or prospective fund managers.
“Many of the clients I work with, from charity board members to superannuation scheme trustees, are eager to engage with managers to become more informed on how they plan to achieve investment objectives, but perhaps don’t hold a wealth of experience in quizzing investment providers,” Gregory says.
First up, he says investors should push for a clear explanation of fund managers’ “competitive advantage”.
“Slick presentations with colourful graphics can paint an impressive picture, but a fund manager should be able to tell you, in plain English, how they’re different,” the article says.
“A competitive advantage may not always show on a fund’s performance factsheet. Rather, it can often come in the form of small, tangible elements.”
Gregory recommends investors also probe managers on their recent portfolio mistakes, looming risks, ESG approach, carbon exposure as well as pressing for a jargon-free break-down of strategies.
“Ask your manager how best to explain complex approaches to people with limited knowledge of the financial world,” he says. “It could save you a lot of time and frustration.”
Finally, Gregory says investors should ask fund managers to describe any risk-hedging strategies they may be using to combat increasing volatility.
“Amid current economic uncertainties, managers are utilising various tools and mechanisms to mitigate risks. This can come in the form of economic risks, like inflation, or more material risks, such as the climate transition,” he says. “Currently, there is a broad shift in allocations towards assets that can help provide some inflation protection, such as real estate and commodities, but managers will be aware of other risks explicit to their holdings.”
But the list is not exhaustive. Gregory says “you can never ask enough questions”.
“If there’s one thing I know about fund and investment managers, it’s that they really like to talk about their work,” he says. “Indulging them may prove pivotal to understanding how they’re helping you achieve your objectives.”