Manager selection is arguably one of the most important aspects of institutional investment. The ability to identify and partner with the best managers in the market is crucial to the performance of institutional portfolios. During Trusted Insight’s interviews with LPs at institutions of various types and sizes, they revealed the secrets of selecting the best managers.
CIOs and investment directors said the best managers usually demonstrate these five qualities:integrity, repeatable investment process, clearly-defined philosophy guiding investment decisions, a strong sense of partnership and consistence performance.
People
"We spend a crazy amount of time actually with the people themselves. Our belief is that we are committing to people more than we are anything else. We screen by legacy bios, track records, etc., but thereafter we commit by placing the highest weight on the caliber of the individuals. We honestly can’t realistically evaluate the likelihood of a therapies’ product potential, but if we properly assess the individual’s intelligence, business skills, personality etc., we’ll better manage our fund’s outcome, or at least likelihood of desired outcome." -- David Holmgren, CIO at Hartford HealthCare
"Smart, ethical people are key in both private and public investing. In private investing you are committing for 10-plus years and don’t have the flexibility to change your mind. It is critical to partner with high-integrity people who respect their LPs and whose terms reflect a true alignment of interest with their investors. We look for private investors with deep specialized expertise who are experienced in executing their strategy...We partner with managers who are intellectually honest, humble and continuously looking to learn and improve." -- Colin Ambrose, CIO at UJA-Federation Of New York
"It's important to us that the firms we’re assessing now can repeat, and that is feasible through the people, the organization and the strategy, as opposed to a one-off circumstance. We want to see that whoever created the returns will still be there, and if there are going to be any changes that we are comfortable with that. The human element is part of the repeatability, and intellectual capital is really key for these firms." -- Novisi Nirschl, Director at Memorial Sloan-Kettering Cancer Center
"A manager’s past track record is obviously a component, but also the individual, their academic training, their prior work experience, where they've worked, how long they've worked, who they've trained under, the successes or failures that they might have had at those prior firms, the particular strategy that they're pursuing and their ability to execute on it, the team they've put together, the research projects, their portfolio management skill or philosophy, among other variables. All of those elements come together in an assessment of whether or not we think they're a manager that we want to partner with." -- Michael Buchman, Investment Director at Conrad N. Hilton Foundation
"We look for an ability to create value and do something with an asset. Be it a company, an idea or a property. Someone who can take an investment and build it up to something that's worth more than where they started out. It’s about finding people who can recognize value in an asset and be actively involved in realizing that value." -- Erik Lundberg, CIO at The University Of Michigan
"The integrity and skill of the portfolio manager is very important to me. The process by which they make internal decisions on their investments, and how they manage risk is also very important to me." -- Archibald E. Asawa, CIO at The Soka University Of America
Process
"We underwrite people and processes. A well articulated and consistent process with the right pairing of human capital is key. Alignment of interests are also important. Thereafter, our ongoing monitoring is about ensuring that the things we underwrote are still in place." -- Edmond Fong, Managing Director Of Absolute Returns at The University Of California
"When I look at investments, I’m not looking for home runs. I try to find those firms that have been able to show consistent performance that take an appropriate level of risk, and don’t use a lot of leverage. I’m basically looking for singles and doubles. Ultimately, I think it always comes down to the integrity of the firm itself." -- Archibald E. Asawa, CIO at The Soka University Of America
"We look for original thinkers with a proven process that is repeatable. We are always asking ourselves, what is the manager’s edge? Do we understand their process, is it repeatable, and can it generate alpha going forward?"-- Philip Griffin, Director Of Investments at Southern Methodist University
"Repeatable process is the biggest thing. Obviously you wouldn't be talking to them if they didn't have a good track record. You try to understand their investment process and assess their ability to repeat on that investment process that has lead them be successful in the past. We do believe that smaller, niche strategies have a better chance for outperformance than the larger asset-gathering firms." -- Chris Halaska, CIO at Memorial Hermann Health System
"I always look for managers who can demonstrate their edge in the strategy. For some, this can be driven by their investment process: do they have a very process-oriented approach? Does this process create a repeatable strategy?" -- David Barcus, Investment Manager at Denison University
Philosophy
"There is no formula per se. There are a lot of qualitative and quantitative factors that we consider with all our investments. A manager’s particular investment philosophy, approach to portfolio construction, position sizing, risk management, as well as skills such as cultivating a strong culture within the firm or managing a team are all important." -- Courtney Powers, Director Of Marketable Alternatives at The University Of Texas Investment Management Company
"Rather than focusing on performance we’re interested in their long-term strategy, investment philosophy and firm culture." -- Daniel Ricciardi, Investment Officer at The College Of The Holy Cross
"We start with the investment philosophy and process for a manager and then evaluate the quality and interaction of the management team." -- Aaron Houlihan, Investment Manager at Catholic Health Initiatives
Partnership
"Our best managers are always curious about how we see the world and view the relationship as a partnership, not as a source of funding." -- Daniel Ricciardi, Investment Officer at College Of The Holy Cross
"We look for managers that are good partners. That’s something that shows up in the terms that they offer to their investors, the way that they think when they lose money, how they make that up to their investors, the transparency of the relationship." -- Meredith Jenkins, former Co-CIO at Carnegie Corporation
"One of the things that we like to focus on is: how can our capital not just be a commodity to a manager? We really want this to be the true definition of a partnership, and that's often what we're looking for. Not only how they can manage and make money for us (which we obviously hope that's an outcome), but how they can be beneficial to our portfolio in other ways, and how we can be beneficial to them. Something that we like to focus on a lot is this concept of a true partnership and our capital not as a commodity, but as a relationship builder between a manager and ourselves." -- Dean Duchak, Director Of Investments at Kaiser Family Foundation
"The most important quality in a fund manager is their integrity and the relationship and trust that we can develop with them. Are we treated like a partner? Or are we treated like a client, another revenue stream? We're really looking to be a partner with these investors, hopefully for a very long time." -- David Barcus, Investment Manager at Denison University
"Integrity and the spirit of partnership – I think it’s increasingly clear who views us strategically and treats us as real partners. I appreciate managers who exhibit humility and emphasize alignment." -- Yup Kim, Senior Portfolio Manager at Alaska Permanent Fund Corporation
"We are looking for an organization that demonstrates cohesion and sound governance across the team, the organization, process vis-à-vis strategy, its relationship with limited partners, its relationship with regulators and other third-parties and in the partnership documents. While we believe these factors will lend themselves well to a good partnership, we are ultimately looking for great partners that treat us as such." -- Linda Calnan, Senior Investment Officer at Houston Firefighters' Relief and Retirement Fund
"Our CIO Paula Volent once said to me, 'You can't just date this manager, you're going to have to marry them.' When you invest in a private fund, that's a long-term relationship. You're going to have to be with them through the good and bad." -- Amy Jensen, Investment Director at Northwest Area Foundation
Performance
"We look for managers who can provide alpha less correlated with our other investments. We also look for consistency and persistence of alpha vs. a manager’s peer group." -- Aaron Houlihan, Investment Manager at Catholic Health Initiatives
"In general, when I do look at investments, overall, I’m not looking for home runs. I try to find those firms that have been able to show consistent performance that take an appropriate level of risk, and don’t use a lot of leverage. I’m basically looking for singles and doubles. Ultimately, I think it always comes down to the integrity of the firm itself." -- Archibald E. Asawa, CIO at The Soka University Of America
"We look for consistency in their ability to generate excess return. We look for a strong team, a team that can combine knowledge about asset classes, insight on specific investments and can communicate those clearly" -- Ana Marshall, CIO at William And Flora Hewlett Foundation
"We look for the same thing in every private fund manager: a meaningful enough history of consistently addressing an asset class that we have determined is an attractive market." -- Stuart Mason, CIO at University Of Minnesota
"There are several things: the integrity of the firm, the consistency of the strategy and the strength and depth of the team. In some cases it's their ability to have executed a transition from one leadership team to another generation." -- John Hull, CIO at Andrew W. Mellon Foundation
"Do they have a size of the organization and portfolio that's consistent with the strategy that we'll be able to, if they've generated good returns in the past, continue to generate returns at that same size level?" -- Lawrence Kochard, CIO & CEO at University Of Virginia Investment Management Company