Technology is having a profound impact on our access to information and our ability to transact has made investing easier, yet ironically, more difficult.
Our expectations of investment managers are higher, our reliance on their professionalism increasing. Mandatory superannuation means that balances are getting larger, mandates are broader, and institutional investors are shouldering increasing responsibility for investor outcomes.
Endowments, charities, and family offices are required to be more transparent and longer term focussed. At the same time, we are living longer, while average super balances are low, which means self‐funding is imperative for many of us.
The problem is that, as in any field of endeavour, with evolution comes the need for greater specialisation. And one of the most important specialist skills is the ability to manage a portfolio as a whole, in many cases via multiple investment managers. This is different from the ability to successfully invest in different asset classes individually.
It is often argued that portfolio management, in the form of asset allocation, is the largest determinant of long‐term investment performance. The question now is whether investment managers have the skills required to successfully navigate a sea of changing financial imperatives. And whether asset owners have the skills to oversee them.
What standard should you expect of investment managers? And how do we define and monitor standards?
Portfolio management goes well beyond financial advice or analysis
The challenge of successfully managing an investment portfolio goes beyond making a series of good individual investment decisions. Analysts analyse data and risks and give opinions based on the results. This is a fundamentally different skill from the ability to think about overall risk the right way. That is the job of the portfolio manager, who must be able to identify risks including externalities such as material environmental, social, and governance risks.
The skill of the portfolio manager lies in the ability to structure a portfolio so that unforeseen events do not result in the loss of the entire, or even a significant portion, of the fund. And that can mean managing interactions between a number of underlying managers to ensure diversification and correlation.
Portfolio management skills require specialist training, including tracking the progress of investments, knowing when to sell and how to get the mix right at any point in time. More of us are assuming we can take on this role of building portfolios. The major superannuation funds obviously do it, but so do SMSF trustees, Family Offices, and even individual investors.
We all have a responsibility to make good decisions. In the case of institutional investors, decisions have far‐reaching consequences ‐ the influence on corporate Australia, the performance of individual asset classes, and on individual investor outcomes can’t be overstated.
How do we achieve the necessary level of professionalism?
The short answer is a robust qualification with the requirements for ongoing maintenance and work.
Qualifications such as CFP and CFA remain vital, but a portfolio management qualification is needed to fill the gap:
- The qualification should be international and set the bar for investment managers involved in any aspect of constructing multi‐manager portfolios.
- It must require rigorous ongoing CPD points.
- Ethics must be a major part of the qualification, as ethics drive conduct and conduct drives outcomes.
- ESG is no longer a ‘nice to have’; climate change, for example, is increasingly posing a real risk to financial stability.
We are at a point in the evolution of portfolio management and portfolio governance. Specialisation is now essential. With investors living longer and usually relying on retirement savings for many decades, the consequences of poor decisions are serious and the expectations of stakeholders higher than ever.
Pauline Vamos is the chair of CIMA Society of Australia (formerly IMCA Australia) and also the CEO of Regnan Governance Research & Engagement. She was CEO of the Association of Superannuation Funds of Australia (ASFA) between 2007 and 2016.