Accessing high quality
For advisers, it can be complex to make headway through all these changes, particularly if you are used to relying on funds that passively track indexes.
This is precisely where discretionary fund managers (DFMs) can help, taking over the tactical buy and sell decisions by using the expertise of specialist managers.
However, when it comes to picking the right international DFM, there are several things you must consider.
For active management to add value, your DFM must have access to high quality fund managers who have proven history of delivering alpha.
These are often managers working in smaller, specialist businesses, using their core skills and industry knowledge to stand out from the index and generate above average fund performance.
Ultimately, it’s with this expertise that your discretionary manager will be able to use the changing economic climate to their advantage, through tactical asset allocation, manager selection and strategic portfolio construction.
Adhering to the client psyche
It’s also important that you find a discretionary manager whose strategy is aligned to your client’s investment goals.
After all, you are outsourcing the management of your client’s hard-earned capital, and you need to find a manager that can both meet the expected returns, but with an appropriate level of risk.
For example, for older clients who may be seeking to adjust their level of risk, you’ll need to find a manager that uses a more conservative strategy with managers that have the expertise to actively mitigate any downside.
Not only is it important to find a DFM that is aligned to your client’s goals, but also one that uses a pool of quality managers aligned to its own investment philosophy.
Institutional quality
While access to talent remains crucial, giving a discretionary manager ultimate control of the investment approach is a big step, so it’s also vital that you find a DFM that offers high levels of scrutiny and transparency – one that uses an institutional level approach to selecting fund managers.
That could include regular meetings with sector specialists or portfolio managers every year, and a formal approval process when confirming managers, such as a due diligence questionnaire, office visits and monthly peer review meetings to assess performance.
It’s also important that your discretionary manager offers an excellent level of transparency, with regular investment updates, access to fund factsheets and risk and performance oversight.
Importance of diversification
Finally, to take advantage of the current macro-economic climate, diversification remains key.
Not only does that mean mixing your assets, from equities to bonds and alternatives, or the regions the fund is investing in, but also the approach the investment manager uses within the fund.
In the search for alpha, passive and active strategies should work in harmony, rather than against each other.
The most successful managers will adopt a mix of both passive and active funds, tilting their funds in either direction to make the most of any gains or mitigate any downside.
Looking ahead
So, as many have predicted in recent times, is active management really dead? Macro-economic factors certainly don’t seem to point towards that being the case.
As the global economy begins to shift from monetary to fiscal policy, rising inflation and increasing volatility brought on by political uncertainty, active managers are charged with the opportunity to add alpha through expert asset re-allocation and stock-picking.
The one-hand fits all passive ETF approach is no longer the best way to protect and grow your client’s assets.
New opportunities are certainly on the horizon for active managers, but much like the assets you invest in, it’s important to diversify your approach to strategy to make the most of your client’s capital.
