Four red flags that mean you might need to move your clients' money

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Nick Samuels, head of manager research at Redington
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Nick Samuels, head of manager research at Redington

It's the age-old dilemma for wealth managers: when is the right time to pull your clients' money from a fund?

In an ideal world, a fund manager would be like a puppy - for life. But things rarely work out that way.

Whether it's poor performance, a change in style or a manager moves to a rival, you may decide you have to move your clients' money before you would have liked to.

As fund selectors, it's our job to spot the warning signs before they threaten your clients' returns.

However, there are certain red flags that all wealth managers should be aware of so they can take the appropriate action if necessary.   

Staff exodus

When a fund manager leaves, it's often big news, particularly in the trade press - and for good reason.

Managers are often the trigger-pullers, the ones ultimately calling the big shots when it comes to which firms a fund should invest in and which ones it shouldn't.

But they are supported by a team of researchers, risk experts and salespeople, all of whom play a vital role in a well-functioning strategy.

So, when you see headlines that a raft of salespeople have left an asset manager, for example, it should raise concern.

While there may be a perfectly reasonable explanation for this, in our experience it is typically because the sales staff feel as though they don't have funds of sufficient quality to sell.

Similarly, when key members of the risk team leave, it may well be a sign that they are having little influence over the bets taken by the manager, which is a dangerous position to be in.

Equally worrying is when key members of staff leave and are not replaced.

Again, there may be a good reason for this, but it could also be a sign the asset manager is struggling financially and so is forced to cut costs.

A takeover

While key staff leaving is worrying, a takeover by a rival asset manager presents its own set of problems.

For us, this is one of the biggest red flags there is as you never truly know how a takeover will affect the culture of a firm.

The main worry for us is that the asset manager we have backed goes from being investment-orientated to sales-orientated. While that in itself isn't a guarantee that performance will dip, the chances increase significantly.

We have also seen cases where a small, well-run, successful fund that we liked is pushed heavily by the new owners so they can profit from having larger assets under management. Again, this is often accompanied by a drop in performance.

In a takeover situation, there is also a heightened risk that existing staff with either be let go or leave to find opportunities elsewhere.

Capacity

Many studies have shown that funds that grow too large often suffer from underperformance.

Therefore, we find it concerning when a manager takes on lots of assets in a relatively short space of time.

In this scenario, we may choose to de-rate a manager that we believe is simply growing a fund to collect higher fees, particularly if we can see a dip in performance.

Slightly less conspicuous - but equally alarming - is when an asset manager sets up a clone of a successful existing fund but merely calls it ‘sustainable' or ‘focused'. For us, that is merely a veiled attempt to make money off a successful strategy.

Process

When we choose fund managers, philosophy and process are possibly the most important factors in our decision process.

Therefore, when we see a manager who used to invest solely in large-caps start to foray into smaller or unquoted companies, it raises alarm bells.

Unless you are a professional fund selector that gets access to a fund's entire holdings list, it can be difficult to spot.

However, sometimes a manager may publicly announce a change in the fund's mandate, either in the press or in a quarterly fact sheet.

While these are not an exhaustive list of red flags, they do go to show that seemingly small events and actions could potentially have a detrimental affect on your client's portfolios.

And, more than anything, it goes to show that fund managers often really aren't for life.

 

Nick Samuels is head of manager research at Redington