How to choose an investment manager
The first thing you should do is think about what you would like to achieve for your client.
Do you want to meet your ongoing care needs, grow the award to meet future needs, or a combination of both? You should then consider the amount of time the client can stay invested, any ethical restrictions, and their risk capacity.
The length of time an investment can be held plays a critical role in defining an investment strategy. In general, volatility is smoothed over time, which means that the longer a client stays invested, the more their portfolio will be protected from short-term ups and downs.
The time horizon might be unclear for clients that have sustained catastrophic injuries, but the recommended minimum amount of time to invest in equity markets is 5 years. Investment managers will generally be reluctant to manage portfolios for shorter periods of time.
The investment manager needs to help you establish the most suitable level of investment risk for your client. You need to consider several variables, which include risk appetite (how much you’re willing to take) and capacity for loss (how much the client is capable of withstanding).
While there’s no risk-free investment, it is possible to reduce ‘specific’ risk by having a well-balanced, diversified portfolio. A ‘specific risk’ refers to the risk of loss from a single asset class or investment.
Not all investments will move together – some will inevitably go down while others go up. Capacity for loss is tied to risk since the less a client can afford to lose, the less risk you need to take. This is especially important for clients that have received an award of damages, because the funds are required to last for their lifetime and are irreplaceable.
You may want to place restrictions or exclusions on an investment mandate to reflect the wishes and past feelings of the client. Ethical investing usually requires applying a positive or negative investment screen, or perhaps even both.
A negative screen helps in ruling out any companies involved in specific activities. A positive screen, on the other hand, selects companies with strong environmental, social, as well as governance (ESG) policies.
Different investment managers will have different ethical investing methodologies, which is why it is so important to find a firm that has the relevant ethical experience, meets your requirements, as well as a strong performance track record.
How do you evaluate investment managers?
Upon defining the objectives above, you may want to consider the following criteria to identify a suitable investment manager:
The firm and team
The relationship between the investment manager and their deputy is a long-term commitment, which is why you need to make sure that you take a shared approach when it comes to looking after clients. The better the investment team knows you and your client, the more likely they will be to meet your requirements.
The experience of the investment research team, manager, and the wider support team is also important. You need to review the biographies of the primary members of the team before deciding to invest.
Current number of PI/COP clients
If an investment manager has many COP clients, it means that they likely have a greater depth of experience in the sector.
It is important to meet on a regular basis for the purpose of reviewing the investments, so be aware of how feasible it is to meet in-person with the necessary frequency.
Assets Under Management (AUM)
It is up to you to decide your preferred size of manager, usually judged by AUM – of the firm in total as well as of the PI/COP team.
Still, keep in mind that the larger investment management firms will usually have a dedicated COP investment team whose expertise covers the management of PI awards and will likely have a better understanding of the needs of your clients compared to generalist investment managers. They will also likely have more purchasing power, which should be beneficial for the client in the long-term.
Styles, processes, and philosophies will vary depending on the manager, and you may have specific preferences. Portfolio volatility is one important factor that you should consider along with their maximum drawdown during periods of market stress.
PI/COP clients that are obviously not ordinary investors, which is why it is usually better to target a steady return as opposed to facing volatile markets.
Liquidity is simply a measure of how quickly you can sell investments for cash. You need to specify any liquidity restrictions right at the outset.
The investment manager should typically be able to sell most of the portfolio assets in less than 10 days, but there could be a small proportion that may take longer. You need to make sure that your client still holds sufficient funds in cash, so that there’s no need for withdrawing from the portfolio at the most inopportune times.
Past performance is not necessarily indicative of future performance, but it can point to the effectiveness of a firm’s decision-making and processes, so you should request a performance record over 3, 5, and 10 years.
You can evaluate performance in absolute terms (whether the strategy actually delivered profits or losses) and/or compared to the performance of the market, the firm’s peers, as well as benchmarks, and perhaps your own benchmark. You should also check whether the performance is net or gross of fees, including VAT (where applicable).
You can expect to be in contact regularly with the investment manager that may also communicate the firm’s investment views. You need to receive a comprehensive valuation of the portfolio at least once each quarter. Consider if digital reporting is something you consider important.
You can generally expect that the higher the portfolio’s value, the lower the management fee will be as a percentage of portfolio value, and the reverse is also true. You need to have a good understanding of the total fee to be paid by the client, and whether a cap will be applied by the investment manager, since this can make a huge difference to net returns.
It is referred to as the ongoing charges figure (OCF) and includes an annual management charge (AMC), VAT (if applicable), and potentially other costs, which include fees for outperformance, custody and transaction costs, cost of third-party funds, and exit fees.
Investment managers sometimes provide additional services for their PI/COP clients such as checking the accuracy of periodical payments.
The financial services industry in the UK is regulated by 2 separate entities: The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). To report an issue or check the legitimacy of a financial institution, the FCA is where you should start.
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