Manager selection: a research process for trustees to follow

A research process a trustee cannot examine is a research process a trustee cannot rely on.

Establish whether returns were earned by a repeatable method, or by chance

This is the most difficult pillar to assess and the most important. A strong track record produced by a sound, repeatable process is one proposition; the same track record produced by a single successful style bet, or by chance, is quite another. Testing this pillar means probing the manager’s investment philosophy, security selection methodology, risk management framework and sell discipline. It also means asking whether what worked in the past has the durability to keep working as conditions change.

The questions should be adapted to the type of strategy. Active managers are best tested on stock-selection discipline. Passive vehicles are best tested on tracking accuracy and how securities-lending revenue is treated. Alternative strategies are best tested on how idiosyncratic risk is identified and managed.

Test the team behind the process, and re-test whenever it changes

A process is only as durable as the team executing it. This pillar tests the experience, incentive alignment, diversity of perspective and stability of the people actually managing the money, not the manager’s brand. A manager that has lost a key decision-maker is, in effect, a different manager, even where the name on the door is unchanged. A process that tested well only months earlier can unravel once the people behind it change.

This is the pillar most likely to need re-testing outside a scheduled cycle. A meaningful change of lead manager, a change of ownership at the manager, or the departure of key personnel should trigger an immediate re-review rather than waiting for the next scheduled interval.

Test the fee against the peer-group median, and look for costs the headline number hides

Fees compound. A manager charging half a percentage point more than its peers, with no compensating value, costs an investor materially over a multi-decade horizon. This pillar tests a manager’s headline fee against its peer-group median. It then examines the embedded costs a headline fee can mask: transaction costs, performance-fee structures, and, for pooled vehicles, how securities-lending revenue is treated and shared.

Where a trustee’s assets, or a consultant’s aggregated client assets, give genuine negotiating scale with a manager, that scale should be used. It can secure more competitive terms, provided the manager remains appropriately incentivised to deliver. A fee that is merely low is not the objective; a fee that is justified by what it buys is.

Test for evidence of ESG integration, not for a manager’s own declarations

This pillar tests for evidence rather than declarations. It examines how a manager identifies and assesses environmental, social and governance factors, and how those factors influence security selection in practice. It also examines what stewardship activity the manager undertakes, including voting record and engagement with investee companies. The pillar applies regardless of whether a manager markets itself as ESG-focused: one that never mentions ESG is tested on the same evidence as one that leads with it.