THE volatility over the past three years has created a difficult market for all investors and investment managers alike.
Investors will not easily forget the crash of '08/'09 and while some participated in the subsequent rally, 2011 has caused many investors to re-examine their strategy.
At the time of writing, the TSX is down 10 per cent yearto-date and the downturn in the markets this summer has created challenges for investors. What this correction does provide though, is a chance for us to better evaluate the investment strategies of professional money managers to see what is working and what isn't. It allows us to separate the good managers from the bad (and the ugly!) because the bad ones can't hide behind the benefits of a bull market. These markets are extremely sensitive to the slightest piece of news which means investment managers need to be on their game in order to grow your portfolio.
As diversification with stocks helps with reducing risk, I believe that diversification with managers is also important. No manager is going to be right 100 per cent of the time. In order to get this diversification for clients beyond our own management of their stocks and bonds, we also partner with four select managers. With over 1,800 fund managers and more than 12,600 individual funds, it's hard for the average investor to really examine them in detail. Our team is very rigorous in our selection and choose only those who have shown a consistent ability to perform throughout various market conditions and also possess certain characteristics that we find common to most successful managers.
One of the key characteristics of highly successful managers is the use of an active approach. These managers are ensuring that profits are taken and losses are cut. The old buy and hold strategy may have worked in the '90s when the markets were rising but this strategy has now become a pitfall for many investors. It's not about market timing; it's about protecting capital.
In order to be active, you must be nimble enough to act quickly. This means that managers who aren't constrained by overseeing too many assets have an advantage over ones that manage huge mutual funds. Case in point, there are many funds that are so huge that it takes the managers days, weeks or even months to sell a stock because they hold so much of it in the portfolio. With markets moving so quickly, you want to be able to protect your investments and this means being able to buy and sell on a moment's notice if needed.
Successful managers also have well defined and disciplined strategies including an exit strategy should a decision not work out. This is actually one of the questions I ask of all managers and it's shocking how many cannot easily explain their decision on when and why they sell a stock or bond. Simply asking "how do you decide when to sell a stock?" can shed a lot of light on a manager.
These are just three important factors that I have found are common to the most successful managers but there are a number of other considerations to include when evaluating an investment manager and deciding to allocate any of your hardearned money. These characteristics will provide a shortlist of active managers with the flexibility to trade efficiently and have clearly defined strategies which will improve your search for the right managers.
We will be showcasing a select few of Canada's top investment managers at this year's second annual Vancouver Investment Summit and I feel this is a rare opportunity for investors to hear directly from the managers themselves to learn how you can navigate this tough investing environment.
Lori Pinkowski is a Portfolio Manager and Senior Vice President (PCG) at Raymond James Ltd., member CIPF. She is also a financial commentator on CKNW every Friday at 5: 35 p.m. She can be reached at 604-915-LORI or www.pinkowski.ca.
