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Manager risk a 'valid concern' for active funds

Manager risk a 'valid concern' for active funds

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By Killian Plastow ·
May 04 2017

Manager risk a 'valid concern' for active funds

Actively managed funds only add value when they are led by a "high quality" manager and advisers need to identify whether a manager is good or not before investing clients' money, according to Montgomery Investment Management.

Manager risk a 'valid concern' for active funds
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Speaking to Adviser Innovation, Montgomery Investment Management portfolio manager Andrew Macken said advisers who can't assess the quality of a fund manager risk putting clients into funds which will incur greater portfolio losses than a passive fund would have.

"Investing in an actively managed strategy only works if you have a high quality active manager; one that's got a good chance of outperforming the market," he said.

"If the way you're going to choose your manager is to throw a dart on to a board full of managers and just go with wherever the dart lands you're just as likely to find a bad active manager, which would potentially generate underperformance, as you are to find a good manager that gets you that outperformance."

Mr Macken said advisers should be aware of the risks associated with choosing an active manager and ensure they have an appropriate methodology for selecting a suitable manager for their clients.

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"This concept of manager risk is absolutely a valid concern, and for investors that are honest with themselves and recognise they have no ability to predict or assess who's good and who's bad, they should probably just invest passively," he said.

"But, if you are so inclined to take the time to compare and contrast the investment processes of different managers and make an assessment with respect to the discipline with which the manager follows the process they articulated, and are happy to make a judgement call over the aptitude of said manager, their background and ability, you can make an educated guess about who's a high quality manager and will probably be rewarded for going with that manager."

Mr Macken said there were four attributes advisers should look for in an active manager; a logical investment process that makes sense to investors, a disciplined approach to enacting their investment process, adequate credentials, and trustworthiness and ethical conduct.

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