James Hoare is Managing Director at Enhance MPI, an aggregator of investment performance data from firms across the entire wealth management industry. Here, he explains the importance of peer group comparisons in ensuring your money works as hard as it might.
What are the Managed Portfolio Indices (MPI) and how they can they help investors ensure they are getting the best possible investment performance?
James: Enhance MPI is an independent provider of investment performance data. Like findaWEALTHMANAGER.com, our mission is to provide investors with transparency.
We get monthly performance figures from over 50 leading private client investment firms, aggregating these to compile our Managed Portfolio Indices (MPI), which we release quarterly. We don’t recommend specific investment managers, but rather give people the tools to make informed decisions about where the best value service lies – whether they are monitoring an existing provider or choosing their first one.
Without peer group comparisons, you have no way of judging how well your manager is doing for you. Even if you’re broadly on target for your long-term objective, it’s important that you understand what the alternatives are
Without peer group comparisons, you have no way of judging how well your manager is doing for you. Even if you’re broadly on target for your long-term objective, it’s important that you understand what the alternatives are.
How do does your benchmarking account for all the different risk models portfolios might follow?
James: Wealth managers approach portfolio risk-ratings in different ways, and we believe this makes comparisons made by forcing them into very broad “risk buckets” slightly spurious.
We have low-, medium- and high-risk categories to aid conceptualisation, but our benchmarks show performance in line with the way each particular manager runs the money; if they manage their portfolios in line with five models then we will provide five sets of numbers placed in the appropriate ranges.
Wealth managers approach portfolio risk-ratings in different ways, and we believe this makes comparisons made by forcing them into very broad “risk buckets” slightly spurious
This enables investors to make more meaningful comparisons between providers who might do things in slightly different ways. It’s about accuracy, but more broadly, it’s about encouraging investors to think in terms of how much reward they are getting for the amount of risk taken on, rather than just a single headline performance number.
Top Tip
Our 3-minute search is designed to produce a shortlist of best-matched wealth managers so that you are set up to make like-for-like comparisons. Then, when you meet these firms you are well placed to get granular on looking at performance and fees side by side. If there is anything you would like clarified or presented in another way to assist you in your choice, don’t hesitate to ask.
Lee Goggin
Co-Founder
How should investors go about ensuring they are getting the best possible investment performance from their manager long term?
James: It’s important to have a long-term goal for your portfolio, which might be Consumer Price Index growth plus three percent, for instance; but it’s also important to have a comparative benchmark, such as a peer group, so you can judge how well your manager is doing for you against other similarly run portfolios.
Be aware, however, if your long-term objective isn’t being met, that might be because nobody is meeting that long-term objective. It might be unrealistic.
It’s important to have a long-term goal for your portfolio, which might be Consumer Price Index growth plus three percent, for instance; but it’s also important to have a comparative benchmark, such as a peer group, so you can judge how well your manager is doing for you against other similarly run portfolios
Conversely, your manager might be consistently hitting objectives where the bar has been set too low and you might have been better off with another manager.
It’s important not to look at performance in isolation, however. There is always a trade-off between risk and reward.
What else should inform the picture on performance, then?
James: Bear in mind that many wealth managers primarily aim to protect investors from drawdowns [these being peak to trough losses in value], so we suggest in any conversation you have begins with the compromise between risk and return the manager is making.
For example, some managers will build a level of protection into their strategies to cushion investors from the worst effects of a market downturn. There is a cost associated with buying this “insurance”, in that performance in the good times might be slightly behind the peer group, but some find that is a price worth paying for that peace of mind.
Your time horizon is also critical in terms of your capacity for loss. Your investment strategy typically has to change dramatically as you progress through saving for retirement through to drawing on those funds, for example.
