Diversification with Purpose
Diversifying your portfolio by asset class and investment manager is a sound strategy. It spreads risk and provides exposure to various management styles and market perspectives. However, many investors inadvertently over-diversify within the same asset class. For instance, having multiple managers handling Canadian equities can lead to inefficiencies and hidden risks. Strategic diversification involves not just spreading investments but doing so with clear intent and coordination.
This post will share our family office perspective on managing multiple investment managers.
Establishing a Clear Process
The foundation of effective multi-manager investing is a robust process that is documented. This starts with an Investment Policy Statement (IPS) that clearly outlines your values, goals, and expectations. Communicate these to each manager to ensure alignment.
Regular oversight is critical—our family office demands monthly updates and conducts quarterly reviews with each of our client’s investment managers. Accountability ensures that your portfolio remains aligned with your objectives. If desired, our family office can manage these reviews with managers on your behalf, or you and other family members can choose to join.
Aggregation and Disaggregation: Seeing the Full Picture
Managing multiple managers across asset classes can obscure the true risks in your portfolio. For example, having several Canadian equity managers and a global equity mandate (which might also include Canadian stocks) makes it difficult to identify overlapping holdings. Consolidated reporting is key. It aggregates data to provide a clear view of your total Canadian equity exposure, regardless of which manager holds the stocks. Conversely, disaggregation can break down holdings to analyze risks within specific segments. This dual approach helps you see both the forest and the trees. Imagine viewing the top 10 holdings across three different accounts individually, then seeing an aggregated version that highlights overlaps and concentrations.
Minimizing Overlap
One effective strategy to avoid overlap is to designate a primary manager for each asset class, then supplement to provide diversification and specification. For example, select a main Canadian equities manager and supplement their efforts with a broad-based ETF (that could be ESG aligned) and a sector-specific manager, perhaps one that aligns with your values, but which may be sector or style specific (like a clean energy equity fund). This approach reduces redundancy, clarifies accountability, and enhances the strategic allocation of your investments. Having adequate reporting capacity will help you identify concentration, benchmarking, and values alignment.
Conclusion: Streamline Your Investment Oversight
Managing multiple investment managers requires a thoughtful, disciplined approach. By establishing a clear process, demanding regular updates, and utilizing consolidated reporting, you can uncover hidden risks and improve efficiency. Consider working with a family office to manage these complexities and ensure your portfolio remains aligned with your goals. Ready to streamline your investment oversight?
