The Profile of a Professional Money Manager

This article has been written and provided by UBS Financial Services Inc. for use by its Financial Advisors.

(Part 2 of 2)

Two weeks ago we discussed selecting a professional money manager.  With this column, let's discuss the characteristics we look for in a professional money manager.

Most investors might have the immediate reaction, "that's easy, it's the manager with the best performance", or "a manager that beats the index."  Well, performance is only one measure of a good money manager.  In fact, a singular focus on performance may at times lead us to believe that a manager is better than they really are, or cause us to overlook a manager because of "poor" performance.

Certainly, a money manager must have competitive long-term performance relative to its benchmark and its peers, but a single number can never tell the whole story.  How did this manager earn those performance numbers?  Did the manager deviate from its stated philosophy to achieve those numbers?   For example, investing some portion of a large cap portfolio in small cap companies in an effort to out perform its large cap portfolio peers is a material fact and something an investor needs to know prior to investing.

A professional and competitive investment manager demonstrates more than just a performance track record.  Most professionals would agree that the following characteristics are commonly associated with the leading money managers:

Organization—The manager must be financially and structurally sound, and have the financial, operational and personnel resources to carry out their strategy.  Can they attract talented personnel?  Have their asset inflows overwhelmed their people, trading system and processes? Do they have any outstanding significant legal or regulatory proceedings?

Quality of Personnel—We believe the quality of the people is part of the investment manager's fundamental foundation to success.  Without qualified and experienced people, adhering to and consistently applying  processes are of limited value.  Do the senior people in the organization possess a range of capabilities and talent?  Are the people who generated the historical performance results still with the firm?

Philosophy—An investment manager must have a clearly defined and disciplined investment philosophy.  Without guiding principles, managers will stray, become undisciplined and get into trouble chasing markets.  We believe that a well defined philosophy leads to greater consistency in performance and fewer uninvited surprises.

Process—The methods and procedures used to apply an investment philosophy are what constitutes an investment process.  The techniques used to select and sell securities must be sound, consistent and research intensive.  As much as it may have worked well in the past, it must show that it will work as well in the future.  Past performance is not an indication of future performance.

Quality of Research—The investment manager's research team must have the capacity, resources and experience to evaluate and track investment opportunities.  Are they creative?  Do they avoid consensus thinking?  Are they able to keep their emotions out of their decision-making?  Are ideas implemented in a timely way?

Risk Management—As alluded to above, risk is the opposite side of the performance coin.  Investors tend to focus on the return, but risk is critically important.  What was the risk undertaken to achieve that return?  What's the probability that, in the future, such risk will result in negative performance always taking into account that past performance is not an indication of future performance?  Does the manager understand the portfolio risk in addition to the individual security risk?  Is the level of risk regularly reviewed and adjusted if necessary?

As you can see, a professional investment manager embodies many characteristics, many of which are not easily quantifiable, rendering single category measurement systems incomplete.

                                         Provided by,

Randall V. Brewster                               John G. Brewster

Financial Advisor                                   Senior Vice President-Investments

Portfolio Manager,                                 Senior Portfolio Manager,

Portfolio Management Program              Portfolio Management Program     

                              UBS Financial Services Inc.