Sadiq S. Adatia won’t hire Jacks or Jills of all trades to run his portfolios.
“Not one manager can do every asset class exceptionally well,” says the Toronto-based CIO of Sun Life Global Investments.
To find the right fund managers, he follows this process.
1. Choose specialist managers and firms from around the world, and then match complementary mandates.
So, for instance, within an equities-oriented fund, Adatia will hire one manager focused on Canadian equities, another on U.S. equities and a third on emerging markets.
We make sure their correlations are relatively low, he says. That removes the unrewarded risk.
The best value and growth managers don’t necessarily complement each other. If you have quant and fundamental managers, that’s a good mix. They’re not going to get dinged the same way. It’s not just value matched with growth, it’s also matching investment styles: fundamental with technical; macro with bottom up. We may also diversify among firms.
We then run scenarios looking at past performance of managers X and Y to see how they would have fared together. Are we protecting what we think we’re protecting? If not, ask the PM if it was an anomaly, or something more.
2. Diversify based on managers’ styles, philosophies, volatility strategies and tactical approaches.
We also look at turnover rates: both within the company and within the manager’s stock selection, depending on mandate. A defensive manager will hold names longer because they were bought at discount and need the market to come around.
Some growth managers will buy small positions because they’re high-risk, high-reward — growth will be very high in the beginning. But as soon as they hit their targeted rewards, you want them out of those names, because you usually expect lower growth going forward.
3. Look for consistency.
If a manager’s supposed to do well in down markets, we verify she’s done well in those environments, he says. But if she consistently also does well in up markets, that would raise a flag because she’d be participating the wrong way. She might be chasing returns.
Make sure to look at how managers react to difficult times. If you talk to them and they don’t look panicked, that’s a good sign, he adds.
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How to choose a fund manager >