131 - How to choose an Investment Manager?

Mental Models discussed in this podcast:

• Opportunity Cost
• Alpha
• Superpower of Incentives
• Competitive Advantages
• Process vs Results

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Show Outline Key Concepts for selecting a Portfolio Manager

• Choosing an investment manager is a lot like choosing a stock
  • Don’t invest in anything you don’t understand - this includes managers
  • What is their process?
  • How do they earn alpha? Do you need alpha?
• What are your financial needs?
  • Wealth preservation?
  • Wealth Growth?
  • Do you need alpha?
    • Not every manager can provide alpha. 
    • Not every manager seeks alpha
    • Not every investors NEEDS alpha
• Value
  • Cost - How are they paid? What is the expense structure? How does it compare to alternatives?
  • Management Fees 
  • Performance Fees 
  • Next podcast will be a whole podcast on fee structure, so I’ll limit my discussion on it here.
• Growth
  • Investment managers inherently benefit from growing AUM. This is unavoidable. Regardless of pay structure. However, you want to understand what drives them. Is investing a passion or a money seeking endeavor?
    • Are they trying to grow AUM?
    • Do they plan to shut down growth at some point?
• Quality
  • Competitive advantages?
    • How are they different from other investors?
  • Communication?
    • How do they communicate with clients? 
    • Do you understand their process? Are you comfortable with them?
  • Style
    • Size of stocks
    • Liquidity
    • Value vs Growth vs Quality? 
    • Overlooked companies?
    • Index hugging?
    • Concentration vs Diversification
    •  
• Custom Portfolios vs Investment Fund 
  • Some managers will setup a customized portfolio just for you
  • Or do you simply want to own a portion of a mutual fund or hedge fund.
• Past Performance - Luck vs Skill
  • It is difficult to analyze a portfolio manager based on past performance
  • Instead, focus on their process. 
    • If you understand their process you can potentially understand the odds of future outperformance (if you even need outperformance)

Summary:

Choosing an external investment manager for your wealth is a difficult decision. In this episode, I outline the key concepts you should consider when evaluating someone to be your personal portfolio manager.