Ten years ago, we wrote an article entitled Marking Your Managers. Since then, we have regularly updated the article, but the most important considerations remain the same: how to measure performance; judging strategic and tactical investment skills; ethical and ESG credentials and how to avoid greenwashing, together with a variety of features that might lead to a successful appointment.
This article discusses the service element of an investment manager’s role. What should you expect when it comes to reporting on the progress of your investments? What should a report contain? What non-generic material is it reasonable to ask for? How often should you meet your manager and what should you discuss?
We should caveat what follows with the comment that one size doesn’t fit all. Investment committees have different requirements and are made up of individuals with varying levels of investment knowledge. While most charities employ one investment manager and operate without a paid or professional consultant, some employ two managers and a few employ more than ten. Charities need a system that matches their requirements. However, there are common features that form the basis of a fruitful relationship.
Regular reports
The quarterly reporting cycle forms the basis of most relationships and a good report should mean that formal quarterly meetings are unnecessary. Many charities seek accounting data on a monthly basis or more often. It is unusual for key portfolio material not to be instantly accessible and downloaded online. But what should a good quarterly report include?
- A summary page that sets out the key features clearly: value, high-level asset allocation, recent and longer-term performance (net of costs and compared to the agreed primary benchmark).
- Performance detail: how individual asset classes have performed, attribution (which sectors/stocks had the greatest impact), longer-term analysis possibly against additional metrics (inflation, peer groups).
- Activity: key purchases and sales, money in/out of portfolio.
- Active positioning likely to impact future performance: (for example: geographic, industry, themes, currency, bond duration).
- ESG factors: an overview of the quality of the portfolio and commentary around recent governance and policy activities.
- Commentary: recent performance, current positioning and outlook, including client-specific material. Where managers’ own funds are used, we would expect to see the underlying stocks and factors influencing performance, not just the funds themselves. Funds can make things opaque, both from a performance and ethical standpoint, but modern technology has allowed the best managers to overcome these transparency problems.
Most managers understand the value of investing in a high-quality generic report, with optionality that allows tailoring to meet the most common minority requests. The time spent creating entirely bespoke reports is time not spent thinking about investment and this isn’t good for either the client or the manager. While most managers will try to meet a client’s demands, a good manager will occasionally push back if they feel a request is likely to add no value. Equally, a manager should be attuned to the number of requests for bespoke work; too many regular requests probably indicate that the material is deficient and needs upgrading.
Occasional papers and reports
In addition to regular reporting, we would expect a good manager to be proactive, suggesting occasional additional reviews of bespoke topics such as:
- Income forecasts.
- Longer-term performance analysis.
- Capital-only performance analysis.
- A deep dive into a sector or asset class.
- Strategic asset allocation.
- The merits of deploying currency hedging.
This material might form the basis of an ad-hoc meeting or be built into the regular agenda.
Meetings: regularity, content and length
If all of the above is provided in a timely and clear manner, there should be little need for quarterly meetings. Charity investment is typically long term and better managers will stick to their convictions, with resulting lower turnover. While there will be moments when unexpected events and a change in view require one to be nimble, most of the time, there should be little change between quarters. Indeed, one should probably be concerned if a manager has substantially different views each quarter.
During normal times this probably means two formal and well-prepared meetings, of 30 to 90 minutes long. This should allow a thorough two-way review of activity, performance and outlook. The precise length will almost certainly be driven by the degree to which trustees and investment managers want to dig into the detail, be it on past performance, specific stock positions, views of the future expressed by their investment managers or indeed changes in the charity’s circumstances. Many clients choose to have one longer, more detailed meeting, and one shorter, sharper progress report.
Meetings often work better if some or all of the papers are available before the meeting. We would also expect valuations and client-specific portfolio and performance data to be supplemented with an up-to-date strategy pack. While this presentation may appear rather generic, it is likely to form a key part of client meetings and is often where some bespoke work can make a significant difference to a relationship. Specifically, the level of detail required to convey a message and generate confidence will vary hugely between different trustees.
Reporting is also in the telling: an experienced investment manager will understand and have the skills to ensure that everyone feels comfortable and well-informed after a meeting. Charity managers report to a wider range of investment experience than any other client group. The ability to convey complex messages simply, while not talking down to anyone, is mission critical. Formal meetings might well be supplemented by two or three informal catch-ups between key individuals from both sides, historically by phone but these days, virtually. There will always be trustees, executives and consultants who the other trustees expect to have a deeper level of understanding and more regular contact: it is often better to cover deep dives into the portfolio and strategy outside the regular agenda, so those with more questions are looked after, while allowing wider trustee meetings with packed agendas to keep to time.
The don’ts
There are some obvious pitfalls and bad practices to avoid:
- One or two 15-20-minute meetings per annum. While one short report can work well (perhaps an overview to a wider governing body) we have seen clients try to cover all investment matters in a 15-minute session, which is almost certainly not enough time to perform proper due diligence.
- Four identical meetings a year is probably too many and, if four are agreed, why not work through a rolling agenda covering different asset classes or time horizons?
- Expecting new attendees, often seeing papers for the first time, to add value immediately. An excellent reason for a pre-meeting is to bring a new trustee up to speed with a manager’s approach and the charity’s investment strategy. This can also be an opportunity for other trustees to have a strategy refresher, without crowding out other items at a full trustee meeting.
- From the investment manager’s perspective, most crimes revolve around a lack of transparency, over-complication and weak communication skills. By appointing an investment manager, clients expect a combination of strong investment skills, experience and empathy. This should result in everything being delivered in a manner that everyone can quickly grasp. This might come hand-in-hand with some extra-curricular investment training.
- Point scoring, back-seat driving and 20:20 hindsight. These are mostly the classic failings of current and retired investment managers sitting on investment committees. Mostly, the professional on an investment committee is a fantastic addition, ensuring managers are held to account and everyone around the table is on the same page. Effectively, the professional is a free investment consultant, on your side of the table, with no hidden agenda. However, on occasion, the relationship can become testy and confrontational, which doesn’t help anyone. Current investment managers who sit on investment committees need to constantly remind themselves that while they might not agree with what their charity’s investment manager is saying, markets will only dictate who is right in the future. Seeking out inconsistencies and helping the other trustees understand the consequences of a manager’s actions is one thing. Picking holes in legitimately different opinions rarely helps matters.
Final thoughts
Both written reports and in-person meetings are critical to the success of any trustee/manager relationship. Trustees are likely to benefit from asking to see examples of reporting packages (not just the formal quarterly reports) prior to a new appointment. This is also an area where taking references from a manager’s current clients will help differentiate between them and underlines the value of seeking independent proof of the service element during any review process.
Ultimately, the scale and complexity of investment portfolio, the background of trustees and the importance of the investment portfolio in the context of each charity’s operations vary hugely and there is no single right way of managing reporting and meetings. However, these recommendations are consistent with our experience as both trustees and investment managers, and we believe trustees will be well served by taking them into account.
Richard Maitland is head of charities at Sarasin & Partners
Charity Finance wishes to thank Sarasin & Partners for its support with this article
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