Help with your investment vehicle

WHEN seeking successful wealth management, investors need to decide their long-term financial goals and how much risk they are prepared to tolerate.

For example, if a short-term drop in a portfolio results in sleepless nights, perhaps equities are not the right vehicle for an investor. On the other hand, someone who has 20 years until they are likely to need their investment can weather the short-term fluctuations in equity markets in order to achieve higher returns over the longer term.

Age, overall wealth, financial objectives and attitude to risk are the main determining factors in balancing the right blend of asset classes, such as bonds, equities, alternatives and cash in a portfolio. As a rule of thumb, many asset advisers suggest having 100 less your age in equities, for example, a 30-year-old would have about 70 per cent of their portfolio in equities. However, this may be less if they were planning to buy a house within a few years. This exemplifies the importance of seeking professional financial advice before making any investment decisions.

Selecting the right investments is key to wealth generation over the longer-term. Once a decision on asset allocation has been made, the next stage is ensuring each part of the portfolio is producing the best returns. There are a number of options for investors, but collective investments represent a good way to participate in the stock market with less risk. Collectives will invest in a broad spectrum of investments and the day-to-day selection of stocks is left to an expert. But the problem of how to choose the right fund managers still remains.

Multi-managers, who build portfolios of funds for their clients, look at varied criteria when choosing each individual manager over another – one of the most important criteria is that the manager is properly motivated to perform well. About 75 per cent of managers have no tangible link between the performance of their fund and their pay. This means that if a fund underperforms, only the investors lose out.

Top-performing fund managers often have their interests aligned with those of their investors. They will usually have a substantial amount of their own personal wealth tied up in the fund and their pay and bonuses will be directly related to performance. The fund manager may also own a share of the fund management company. One of the biggest headaches for investors is high manager turnover, which can leave them paying charges to switch from one fund company to another. If a fund manager is properly tied into a company, they are less likely to leave.

Even the best fund managers can see their performance derailed by large inflows into their funds, particularly in areas such as smaller companies where there are liquidity constraints. As a result, many expert investors prefer smaller funds or those that are capped at a certain size. Managing large amounts of money can make it difficult to get in and out of the market, while smaller funds can be more nimble and quick to take advantage of opportunities.

A fund manager's track record is also important. Investors need to be sure that they are getting the full benefits of investing in an actively managed fund, otherwise they might as well invest in a passive fund that simply tracks an index. Investors should look for a manager with demonstrable skill and a history of outperforming their benchmark.

Experience and intellectual rigour counts in fund management. This is particularly evident in times of market volatility when the flighty or inexperienced will often lose their heads. Too much emotion can be a bad thing in fund management, leading to poor, impulsive decision-making. Investors need to be able to trust their fund manager to remain focused in difficult times.

Boutique fund management groups evolved to address many of these issues and ensure that fund managers have the right environment in which to produce top performance. Many of the boutiques to have been established have managed to achieve this, but many have also lacked the organisational support or market profile of the large investment houses to be noticed by advisers and investors.

Resolution Asset Management aims to offer the best of both worlds – a boutique operation attached to an established investment house. Resolution's boutique structure differs from many of its peers. Its 50/50 joint venture between Resolution and fund managers means that the interests of each manager are aligned with those of the end investor. This structure allows the managers to single-mindedly focus on what they do best – managing money – while Resolution delivers the distribution and back office systems and controls.

Many fund managers in boutiques tend to own a share of the business. Their personal wealth is usually tied up in both the success of their funds and the success of the fund company, which aligns their interests with those of their investors.

In contrast, remuneration in many larger companies is often linked to the accumulation of assets, which means managers have more motivation to get new investors, rather than improve existing investors' assets. This culture in many larger fund management groups can also be restrictive. Decision-making can be stymied by large investment committees, while long communication lines can make it difficult to respond quickly to changing market conditions. In boutique fund management groups, managers can concentrate on what they do best, rather than becoming tied down by management and process.

The boutique approach to investment management is now widely regarded as a key generator of high alpha outperformance. Boutiques bring to life the principles of smaller being more effective, allowing more specialist focus, with expert talent actively managing funds and working in a genuinely entrepreneurial style. This is why boutiques believe they will continue to provide one of the best environments for fund management skill to flourish.

Anyone looking to maximise their wealth needs to ensure that they are with the best managers who will do a good job for them long-term. One could argue that the best way to do that is to ensure that their interests are aligned with yours – if they don't generate long-term wealth for you, they don't get rich themselves.