10 signs your manager is in difficulty

- reprinted from financial alert magazine

 1. What impact is falling AUM having on the manager’s revenue/profitability?

A fund manager’s profitability is largely driven by its level of assets under management. With the market down more than 40% and investors withdrawing assets, profitability has been impacted. “This can also lead to questions around whether your manager still has the capacity to retain their key investment talent, or to keep investing in talented juniors,” Russell Investments notes.

2. Has the manager suffered any large client departures?

The loss of sizeable investment mandate ($500k+) significantly impacts revenues and could lead to a contagion effect, Russell argues. “In addition, fund managers which offer niche products which have become undesirable in the current markets are particular watch points.”

3. Is the current environment impacting the focus of key investment staff?

Advisers should consider the depth of a manager’s media and client relationship teams, and the overall ability of the organisation to support its key investment professionals so they can focus on their primary job - managing money - in these tough times.

4. Are you confident the manager has the skills to navigate the turmoil?

Investors need to be confident that the investment professionals have a suitable combination of the necessary skill, experience and attributes to manage through the current turmoil. However, Russell Investments concedes that “The current environment is displaying unprecedented levels of volatility driven by extraordinary market factors – meaning no-one has true experience managing money in this sort of crisis.”

5. Is the manager’s business model reliant on performance fees?

Russell Investments warns these models may be severely impacted by the recent market slump. This could be particularly painful for firms promoting absolute return products, where high watermarks could mean little prospect for performance fees in the coming years “creating a disincentive for managers to focus on the ongoing performance of the strategy,” the house warns.

6. Does the firm carry substantial balance sheet risk?

Fund managers - for example, those offering structured products - which provide an implicit or explicit return guarantee are vulnerable, Russell Investments warns. “Given the extreme market conditions, it is more likely that a manager would be required to make good on such a guarantee, or the size of the payment could be much larger than has been anticipated.”

7. Are there risks around the manager’s ownership structure?

In Russell’s view, some managers may be at risk due to the financial health of their parent companies or joint venture partners. It is important to understand the ownership structure and the financial strength of the parent company.

8. Any signs of capitulation in the manager’s investment decisions?

“It is important to understand whether your manager has capitulated on key portfolio positions or changed its investment process in response to the current climate,” Russell writes, warning that an investor may not be getting the type of portfolio they expected.

9. Has your manager started cutting staff?

Check to see which staffs are being let go, and consider how involved they were in producing the investment performance to date, Russell Investments advises.

10. What is your manager’s product strategy?

When suffering poor performance or lower profitability, a fund manager may try to expand its range of products in order to diversify revenue sources. According to Russell Investments, investors should consider whether new products are a revenue-seeking exercise or actual innovation that is properly resourced and positioned to add value for investors. “They should also be on the look-out for products that have had a large withdrawal of support or have simply become too small due to poor performance. The consequence may be that the product becomes a “legacy” fund and isn’t given proper attention by the manager.”