Asset Allocation Policy and Its Implications for Manager Selection

The Importance of Manager Selection Manager selection is a critical step in implementing any investment program. Even though investment objectives may be finalized and targets for asset class weights set, an investment plan is not productive until it is implemented through the purchase or sale of securities, properties, commodities, and derivatives. In most cases, investors choose portfolio managers to determine the most appropriate instruments in which to place assets. Investors hire portfolio managers to act as their agents, and portfolio managers are trusted to perform to the best of their abilities and in the investors’ best interests. Investors must practice due diligence when selecting index managers or active portfolio managers. Investors want managers who are highly skilled, diligent, and persistent, and they also want managers whose interests are aligned with their own. But investors need to do more than identify skillful managers; they need to determine the appropriate weights to assign to those managers. The goal of this book is to help investors improve their practice of manager selection. It highlights the influence that investment policy statements have on manager selection and proposes techniques for hiring active, indexed, and alternative managers. Strategies for setting portfolio manager weights are also reviewed, along with techniques for monitoring current managers. A large part of the book is devoted to providing an in-depth look at the value of quantitative and qualitative methods for successful manager selection. Special issues for financial advisers and individual investors are also addressed. The book concludes with a summary of key recommendations.