What is your investment manager hiding in your portfolio?

Vikash Gupta, CEO and Ashish Vasudeva, Head of Clients at VAR Capital explain what it is they look for when reviewing their clients’ portfolios.

Since we left the world of private banks to set up a multi-family office, clients expect us to analyse not just the investment portfolios managed by our firm, but also the portfolios that they have with other providers. This has resulted in us reviewing over 50 portfolios for trusts, corporates and family office clients. During the reviews there was a number of similar themes that we came across in various portfolios, which we detail below.

Multiple layers of fees

Many portfolios had a significant allocation to funds, adding layers of fees for clients. Whilst funds have a role to play in portfolios, a high allocation to mutual funds leads to higher expenses and potentially lower returns.

Questions to ask your investment manager:   

Case study: A trust client with a 10m GBP portfolio with a major private bank 

5m GBP of the portfolio was invested in debt mutual funds, so the client was paying two layers of fees; the portfolio management fee and the fee of the underlying mutual fund

A further 5m GBP was invested in equity funds, which as above, also had 2 layers of fees

1m GBP was invested in the manager’s own fund of funds, which essentially had 3 layers of fees: the portfolio management fee, the fund of fund fee and the underlying funds’ fees

Including both the portfolio management fee and the underlying fees of the funds, the TER of the portfolio was over 2%, which is high given the size of the portfolio

Low yielding bonds Many portfolios have significant allocations to bonds with minimal, or even negative returns. Whilst there may be a valid investment reason for such allocation, we found that often it was the result of a rigid and static asset allocation.

Questions to ask your investment manager:

Case study: Family office client with a 25m EUR portfolio

Poor fund selection

Mutual funds can be a positive contributor to performance in a portfolio. In markets where you need local expertise, having a specialist fund manager can improve returns significantly. However, many investment managers have funds in the portfolio which are not offering strong risk adjusted returns and have not done so for some time.

Questions to ask your investment manager:

Case study: Charity client with a major Swiss private bank

High allocation to cash / cash like assets

Cash can be a strategic asset class. It can enable rapid deployment when a good investment opportunity arises. However, some investment managers can have too high an allocation to cash, which could act as a drag on performance. Furthermore, full portfolio management fees are charged on the cash portion of the portfolio.

Questions to ask your investment manager:

Case study: Various clients

Other issues to note or identify while reviewing a portfolio

Whilst there is no right or wrong portfolio management approach, we believe that the investment management industry can benefit from greater transparency, focus and interrogation on the themes detailed above. We hope that this article empowers trustees and client advisers to ask the right questions to their investment managers, leading to better managed portfolios and improved standards for the industry.

You can also read the full article below:

What-is-your-investment-manager-hiding-in-your-portfolio[1]

Contact

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VAR Capital Ltd is a limited company incorporated in England and Wales with registration number 09159540. UK registered office 41 & 43, Maddox Street, Mayfair, London W1S 2PD. VAR Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Firm reference number 718558. VAR Capital is a trademark of VAR Capital Limited under the UK intellectual property regulation. Trademark number: UK00003429839

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