Investing and allocating capital
When Should a Family Change an Investment Manager or Strategy?
Short answer. Consider a change when evidence shows a material problem with the manager, strategy, reporting, or fit with the family's objectives. First determine whether weak results reflect the market, a temporary setback, or a broken investment process. Review the mandate and risks, document the reasoning, and avoid reacting to one disappointing period alone.
Consider changing a manager or strategy when evidence points to a material problem or the investment no longer fits the family's objectives. One weak period is a reason to investigate, not an automatic reason to exit. First determine what happened, whether the original thesis still holds, and whether the manager followed the agreed process.
Check the Mandate and the Explanation
Compare actual holdings and exposures with the manager's stated strategy and the family's mandate. Check whether decisions followed the agreed process. Ask for a clear explanation of material changes. A manager may make a deliberate adjustment within the process, but a move driven by panic or a lack of direction can raise a different concern. Look for evidence that the change had a reason connected to the stated approach.
Review performance over a period suited to the strategy, not only the most recent report. Consider results alongside the risks taken, liquidity, fees, relevant benchmarks, and other factors. Ask whether underperformance came from market conditions, the investment thesis, execution, or a manager decision. A thoughtful review needs more than a comparison with peer returns.
Look for Operating and Reporting Problems
Review the manager's team and ownership. Assess the manager's ability to carry out the mandate. Changes in key personnel, unstable operations, or an unexplained shift in strategy may affect whether the original case remains sound. Ask for accurate reporting on positions, taxes, returns, risk, and other relevant matters. Repeated delays or errors can undermine the family's ability to oversee an investment.
For private investments, examine whether the manager continues to communicate material developments and whether reported valuations have a clear basis. A family should understand what information is available and where uncertainty remains. If the manager resists reasonable questions or agreed review procedures, record that concern and assess its significance.
Use a Deliberate Decision Process
Before changing course, compare the expected cost and risk of staying with the practical consequences of exiting or replacing the manager. Consider liquidity limits, transaction costs, and any contractual restrictions. Talk with your attorney or CPA where legal or tax specifics affect the decision. Document the evidence, the alternatives considered, and the reasons for the final decision.
Set a review date and specific information requests if the committee needs more evidence. A manager can be placed under closer review when the concern is serious but unresolved. Define what would confirm improvement or show that the mandate is no longer being met. This gives the family a consistent basis for follow-up.
Keep the Standard Consistent
Agree on performance and risk measures before a problem arises. Require an explanation when the manager departs from them, and apply the same process across the portfolio. This reduces the chance that the family will excuse a favored manager or dismiss another after a short period of weak results.
Families can set the review process through investment committee practices, assess whether a manager's strategy is repeatable, and review evidence for a manager's track record. For a broader performance discussion, see how to tell whether a strategy is working.
It is important that the family and the board agree with the investment team on the various ways they measure performance
Sources: The Family Office Book, The Single Family Office. Informational only, not financial, legal or tax advice.