Manager Selection, Deselection, and Termination

Abstract

Selecting active managers has been a topic of keen debate for years. Many investors have decided to throw in the towel and allocate only to passive mandates. Yet, alpha is available, although it remains a scarce resource. The key to active manager selection is not only to identify good managers but also to know when to terminate managers and when to deselect them. This article explores the ways to identify good managers and avoid bad managers and provides some guidance as to when to terminate those active relationships.

TOPICS: Manager selection, mutual fund performance, equity portfolio management

Key Findings

• • Many active managers are actually hidden index trackers, hugging benchmarks and providing little active alpha generation.

• • Crowding and momentum are linked and indicate a lack of active manager skill.

• • Active managers tend to flock together with respect to fees rather than justifying their costs based on sustained alpha generation.

• • Frequent hiring and firing of active managers by asset owners may result in reduced returns to the portfolio.