Looking at past performance when selecting an asset manager

It’s often said that the past performance of an asset manager is no guarantee of future performance.  While this is true, past performance still needs to be considered when selecting an asset manager, says Prasheen Singh, Head of RisCura Consulting.  

“It’s important to understand the past performance profile of an asset manager and to analyse how they have fared in different market conditions,” she says.

Singh says an asset manager’s ranking in the performance tables compared to other asset managers isn’t as important as how consistent their performance is relative to the market.  “How have they fared when the market is up; are they outperforming or underperforming? How have they fared when the market is down; are they able to protect on the downside?”

If a manager is able to provide consistent returns irrespective of fluctuating market conditions, you should be suspicious, Singh says. “This is a red flag as performance is dictated by the underlying investments, which should reflect the market and its variability of returns.”

“Asset managers, particularly those managing equities, are likely to have periods of relative underperformance as alpha tends to be lumpy, due to the nature of equity markets and various cycles rewarding various different styles of management at different points in time,” says Singh.

Looking at where the returns are coming from and how an asset manager puts a portfolio together should also be analysed. Where do the returns come from? Is the manager a good stock picker? Are the stock picks coming from a particular sector? If so, it may be appropriate to give the manager a mandate for that sector.  Or perhaps the manager isn’t that good at stock picking, but is excellent at picking asset classes.  Again, it may be appropriate to give them a mandate for asset allocation. 

Look out for any changes in the investment team when analysing a performance track record.  “If a fund has a ten year investment term but has had three different managers over that time, then the entire track record can’t be ascribed to the current investment team,” says Singh. “This will of course also depend on whether the fund in question is driven by an individual rainmaker or if it’s more of a team process.”

“History doesn’t repeat itself, but it does rhyme. You cannot predict what a manager will deliver for sure, but be aware that if the market has done well in growth stocks for example, then a growth manager should have done well. Keep your eyes open for patterns, look beyond the performance tables and choose the manager best suited to your needs,” concludes Singh.

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*This article appeared on Insurance Gateway, on 11 June 2013.