Overview

Investment management is a difficult and important challenge.  Get it right and you have the potential to multiply wealth well beyond your savings.  Get it wrong and you have the potential to lose a substantial portion of your savings.  Unfortunately, most people don’t realize the value of the investment management process until they need their investments to pay the bills.  By then their best earnings opportunities have come and gone.

Professional investment managers create comprehensive processes and procedures that enable them to deliver performance while limiting risk. To help our clients better understand the process, Concho Investment Advisors created the Five Hallmarks of Professional Investment Management.  They are:

  • An Investment Policy Statement
  • Asset Allocation Targets
  • Asset Class Benchmarks
  • A Comprehensive Securities Selection Process
  • Performance Measurement and Evaluation

Investment Policy Statement

An investment policy statement is a critical document that specifies the goals and objectives of the investing entity and specifies what limitations or constraints are in place. Foundations, endowments, and other organizations have a formal written investment policy that describes in detail how the organization’s assets are managed.  We create and implement an investment policy statement for all clients regardless of size.

Asset Allocation Targets

Another important aspect of a professionally managed investment portfolio is a strategic asset allocation process with explicit asset allocation targets based on the client’s goals and objectives.  Studies have shown that 90% of the variation in risk-return characteristics in a buy-and-hold portfolio comes from asset allocation.  This means that the most important decision for a portfolio manager is what kind of assets are in your portfolio.  For example, a proper asset allocation target might be the following:

Assets Target Allowable
US Equities 50% 45.0% to 55.0%
International Equities 20% 17.5% to 22.5%
Fixed Income 20% 17.5% to 22.5%
Real Estate 10% 8.0% to 12.0%

The representatives of the owners of the assets, whether it is the owner itself or the owner’s board of directors or trustees, needs to make the ultimate decision on the strategic asset allocation, based on input by the financial advisor.  The financial advisor is tasked with implementing and documenting the asset allocation target.

Asset Class Benchmarks

Professional investors understand that each asset class must have a benchmark to properly measure asset class returns.  Benchmarks provide the risk/return goal for the assets as well as context for understanding the performance of assets in the portfolio. Appropriate benchmarks are essential for determining if a portfolio is achieving the goals set forth in the investment policy statement.

Securities Selection Process

The securities selection process is a methodology to evaluate available securities in each asset class.  The process needs to include metrics for consistency and performance and must evaluate performance against the appropriate benchmark.  The process should include periodic evaluations that examine securities in the current portfolio to see if they need to be culled as well as securities that can be added to existing portfolios.

Performance Measurement and Evaluation

Finally, professional money managers utilize performance measurement and evaluation to guide their decision process. Performance measurement evaluates the securities selected to ensure that they are performing well against their asset benchmarks and to ensure that their risk is within the goals established for the asset class.

Conclusion

No money manager can guarantee successful investment management.  Professional money managers put in place processes and procedures to create an environment that fosters efficient growth of assets. If you have not implemented these Five critical Hallmarks of Professional Investment Management, then contact us to see how we can get you moving down the right path to professional investment management.

Ed Yale, CFA
President and Chief Investment Advisor