What investors should look for in a fund manager (2023)

As Australia's wealth management industry continues to evolve, it is important that the highest standards are required of companies tasked with managing the savings of others.

Australia's mandatory superannuation system has provided a fertile environment for fund management companies. The barriers to entry are relatively low for a business model that is lightweight and highly scalable.

This backdrop has seen the emergence of numerous business structures, from more traditionally diversified financial institutions to highly focused boutiques with a single strategy. The scenario continues to change, with major mergers between listed companies and industry pension funds, and there seems to be no shortage of high-end startups directly backed by specialist 'incubator companies'.

Faced with such a wide and changing range of options, investors must consider which fund management model will provide the best framework for generating long-term alpha.

At Morningstar, we address this question in our Core Pillar assessment, which is an important contribution to our overall assessment framework.

This article outlines the key attributes we believe investors should look for in a fund manager and examines the different fund management models in Australia.

What makes a good fund manager?

The most important characteristics we look for in a parent company are strong management and the ability to deliver positive net alpha to investors over the long term.

There are many factors that drive this, including:

  • A sustainable business model that will be available to investors in the long term
  • A culture of putting investors first
  • Thoughtful and applied capacity management
  • Focus on creating centers of excellence in investment
  • The ability to attract and retain investment talent

Let's examine each factor in more detail.

A sustainable business model

To succeed, investors must take a long-term view. Therefore, it is vital that any fund manager is considered to be in it for the long term.

With low barriers to entry, many people will try to manage funds, but to build a long-term and sustainable business, a certain level of scale and profitability must be achieved.

Larger, more established companies have an advantage here, but to handle the business risk of new ventures, many startups will seek backing from a well-funded equity partner who can provide a working capital guarantee for a period. Indeed, Australia has seen the emergence of the "boutique incubator model" to address this issue.

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For more established companies, investors should consider the risk of customer aggregation. Large acquisitions (such as by institutional investors) can jeopardize the financial viability of the company.

It is important for investors to review and understand the financial backing and risks associated with the fund manager itself to ensure that they will be around for the long term and not be extinguished prematurely due to lack of profitability.

A culture of putting investors first

To be a good manager of investment capital, fund management firms must have a strong culture of putting investors first.

Unfortunately, there are conflicts of interest in any business, but investors should have a clear understanding of how they are managed.

One of the biggest conflicts is the company's desire to maximize profits, which will come at the expense of investor returns. Fund managers derive their income from investment management fees, which are deducted from investment returns.

As mentioned above, corporate profitability is important to ensure long-term sustainability, but above a certain level fund managers should seek to share economies of scale with investors through lower fees.

Fund management firms may also seek to maximize profits through asset growth and new product development. This needs to be handled carefully so as not to distract or detract from existing offers (see capacity management below).

While all super fund managers and board members of accountable entities have a fiduciary duty to act in the best interests of shareholders, boards of listed companies also have a duty to maximize shareholder returns. That doesn't make them more contentious than private companies, which have their own shareholders to consider, but the profitability drivers of listed companies are more visible because of reporting requirements.

This public corporate transparency can actually be useful, allowing investors to gauge whether the right balance has been struck.

Industry funds are best placed to maximize shareholder interests as profits are reinvested for the benefit of members. However, it is still important to ensure that costs are properly managed and that good management practices are in place.

Capacity management considered

A key component of good governance is well thought out and executed capacity management.

There is a limit to the level of assets under management that a firm can effectively manage before the cost of market impact adversely affects investor returns.

If a fund manager is less conservative in terms of capacity, it may be a sign that they are seeking to accumulate assets to maximize profits rather than protect the interests of existing investors. Since successful businesses tend to attract the highest levels of cash flow, closing or shutting down a new cash flow strategy to maintain capacity can be a difficult decision, but it is an important discipline to maintain.

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The other major driver of asset growth in recent years has been consolidation, particularly in the pension fund industry.

The merger of Sunsuper and QSuper took the Australian Retirement Trust's assets to more than AUD 200 billion, joining AustralianSuper in what is being called a "mega-fund". This is a double-edged sword, as potential economies of scale are balanced by capacity management challenges, especially when combined with internalizing the investment management function.

Unfortunately, there is no standard measure of a company's capability and it is often treated as an art rather than a science. The least useful measure most often praised by fund managers is looking at strategy size as a percentage of total market capitalization. This number has little meaning for active managers who seek to concentrate their investments in specific sectors of the market rather than simply copy the overall market.

Far more useful are the two metrics we focus on: days to trade and significant holdings.

Days to Trade is an objective measure of the time it would take to liquidate an individual position or an overall portfolio based on the average trading volume for that security. As a general rule of thumb, we believe that a fund can trade 25% of average daily volume without undue impact on price. The less time it takes to liquidate a position, the better, as it allows the fund to be flexible to market changes. Less than 10 days to trade represents a very liquid portfolio, but after 30, 60 and 90 days, questions about capacity management begin to arise.

For stocks, we also track the number and weight of significant holdings (above 5% of issued capital). A large number of significant holdings or individual holdings in securities representing more than 10% of the issued capital are indications that capacity management should be considered.

Focus on investment centers of excellence

When it comes to money management, it's better to be good at one thing than average at many. This is one of the key advantages of the boutique wealth management model – a singular focus on one area of ​​expertise rather than suffering the distractions of a diverse product offering.

Larger, more diverse companies can overcome this problem by developing individual centers of excellence under a single corporate umbrella, but it's not easy. The rise of the boutique wealth management model has increased competition for talent. Large diversified companies must continue to evolve to create an environment that cultivates and maintains investment expertise.

Industry funds are increasingly turning to internalizing investment groups. This is a significant change in approach and a significant challenge to maintaining a strong investment culture in every asset class.

The ability to attract and retain talent

Fund management is an industry that depends on human capital and individual talent.

The appearance of the boutique model was due to famous fund managers who wanted to be masters of their own companies and masters of their own destiny. The list of portfolio managers who left large, diversified asset managers to open their own boutiques is long.

While boutiques have an advantage, diversified financial services firms and industry funds are evolving their business models to address the talent retention problem. Revenue-sharing models and parallel share arrangements have become more common as large firms try to replicate the financial benefits of the boutique structure. There are other benefits that a larger, diversified company can bring, such as greater distribution, compliance and administrative support. But this is where boutique incubator models come into play to simplify the business owner experience and allow fund managers to focus on the alpha generation.

The biggest downside to the industry's reliance on individual talent is key person risk.

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Recent history shows that despite all the incentives for shares and profit sharing, portfolio managers can opt out for unexpected and personal reasons.

All fund managers should have a clear succession plan. The onus is on the board and management to ensure that contingencies are well thought out and implemented

An overview of capital management structures in Australia

When it comes to providing the best platform for investor success, the various fund management models in Australia have many advantages and disadvantages that you should consider.

We broadly categorize the market in Australia into three different fund management models:

  • The diversified financial company
  • boutique
  • Member-owned and member-profitable industry funds

The diversified financial company

Diversified financial firms are those that provide investment management services across a range of asset classes, as well as managing their own compliance, marketing and distribution internally.

These are full-service firms, with many historically going so far as to be vertically integrated into consulting.

These companies once dominated the Australian fund management scene. Perpetual and AMP were industry powerhouses, followed by Pendal (formerly Bankers Trust). Major offshore players have also entered the Australian market, either directly (Vanguard, Fidelity, BlackRock and T. Rowe Price) or through acquisitions (Nikko).

The advantages of diversified finance companies are scale, diversification across asset classes and products, and financial strength. Such companies should have longevity when properly managed, although this is not guaranteed, as we have seen in Australia, especially if a company's culture changes course.

The core strengths of the business model have the potential to turn into weaknesses. Size and scale bring complexity and lack of focus, and success can turn into arrogance. As in any business, leadership is key.

Diversified financial companies are able to leverage significant resources not only in investment capacity, but also in product development, customer service, and environmental, social, and governance investments. The downside is the lack of focus on a single area of ​​investment expertise.

It has historically been difficult to retain talent, where talented individuals are attracted by the potential of the more lucrative store ownership structure. Diversified financial firms can handle this in a number of ways. They can make the company bigger than the individual, as happened with Fidelity and Perpetual, or increasingly seek to offer talented individuals equity-equivalent packages, such as revenue-sharing deals.


Shops have boomed in Australia over the past 30 years. The allure for talented leaders to strike out on their own and control their own destiny is strong. The stores have made many people extremely wealthy.

Platinum Asset Management and Magellan Asset Management are two of Australia's most successful boutique investment managers that have grown into major businesses.

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The challenge of starting a new business has been tempered by the rise of boutique incubators like Fidante and Pinnacle. These companies receive a minority stake in the new store in exchange for providing seed capital as well as distribution, marketing and administrative support.

While a single focus is the boutique model's strength, it can also reveal weaknesses.

The success or failure of a store can depend on one or two key people, resulting in significant key person risk.

The viability of the business may also be threatened by the concentration of assets among a few key customers.

Several boutiques have closed in Australia for personal or business reasons, even when a boutique incubator is involved.

Member-owned and member-profitable industry funds

Member-owned and member-owned businesses reinvest profits back into the business for the benefit of all members.

Vanguard has been the poster child for the member ownership model for the past half century, with economies of scale reinvested at lower fees.

In Australia, industry superannuation funds are set up for the benefit of the member and have a similar ethos of passing on full economies of scale to investors.

The success of industry super funds in Australia has brought its own challenges as they have become giants themselves. Capacity management is a key challenge, especially as many funds have internalized the investment function. One solution has been to increase investment in alternative asset classes and unlisted investments, which carry additional liquidity risk.

Industry funds are undergoing a cultural shift as they move from asset managers and allocators to full investment managers.


While fund management firms come in many shapes and sizes, the characteristics that make them effective stewards of investors' capital are not unique.

There is no one model that has all the answers. Instead, investors should examine companies on their own merits and identify where they maximized their strengths and minimized their weaknesses.

Effective management and culture cannot be taken for granted and require ongoing effort by a company's management and board to ensure that interests are aligned and that there is the greatest likelihood of generating long-term net alpha.

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Morningstar is committed to helping investors make an informed assessment of their fund managers through Key Pillar Ratings.


What investors should look for in a fund manager? ›

A positive screen selects companies with strong environmental, social and governance (ESG) policies. Every investment manager has different ethical investing methodologies, so it's important to find a firm that meets your requirements, has relevant ethical experience and a strong performance track record.

What should I look for in a fund manager? ›

A positive screen selects companies with strong environmental, social and governance (ESG) policies. Every investment manager has different ethical investing methodologies, so it's important to find a firm that meets your requirements, has relevant ethical experience and a strong performance track record.

What are 4 things that may be necessary when asking an investor for funding? ›

How to Ask Investors for Funding
  • Keep your pitch concise and easy for the average person to understand.
  • Stay away from industry buzzwords the investors may not be familiar with.
  • Don't ramble. ...
  • Be specific about your products, services, and pricing.
  • Emphasize why the market needs your business.

What should investors look out for? ›

Investors want to know the size of the overall market and the total number of potential clients. The investor would hesitate to invest if the planned market size is insufficient since they might not receive sufficient profits. It must be remembered that the company should be sustained over the long term.

What makes a successful fund manager? ›

They are also responsible for managing a team of investment analysts. This means the fund manager must have great business, math, and people skills. The fund manager's main duties include meeting with their team, as well as existing and potential clients.

How do you judge a fund manager? ›

In such situations, you can evaluate the fund manager on the below parameters to pick the final funds:
  1. Fund manager's investment style: ...
  2. Invest as per the mandate: ...
  3. Investment time horizon: ...
  4. History of managing funds: ...
  5. Number of schemes the manager handles:
Oct 28, 2022

What major questions investors should ask management? ›

Where Do You See Sales Trending in the Next 12 to 24 Months? What Are the Risks Associated with the Sourcing of Raw Materials or Holding the Line on Costs of Services? What Is the Best Use for the Cash on the Company's Balance Sheet? How Does the Company Plan to Raise Capital in Order to Fund Future Growth?

What are 3 things every investor should know? ›

10 Things Every Investor Should Know
  • Investing in a vacuum is never a good idea.
  • You have an advantage over the pros.
  • Asset allocation is THE most important part of investing.
  • Investing is risky!

What are the 6 principles of investor money requirements? ›

The six principles that apply are, (1) Segregation, (2) Designation, (3) Reconciliation, (4) Daily Calculation, (5) Risk Management and (6) Investor Money Examination.

What are the three key factors investors will be looking at in your financials? ›

Of all the things company financial statements reveal to an investor, there are four main factors investors consider: revenue, profitability, debt level, and cash flow.

What are the 7 qualities a good investor must possess? ›

The 7 Qualities of Great Property Investors What makes a property investor great?
  • Good money management skills. ...
  • Good analytical skills. ...
  • Laser focus. ...
  • The ability to develop a solid network. ...
  • Being a good negotiator. ...
  • Long-term thinking. ...
  • Knowing how to be patient.
May 26, 2022

What attracts investors the most? ›

Investment Diversity

You will differentiate your company from others when you show that investing in your business is a unique opportunity with high growth potential. If your company provides investors with an opportunity like no other, they will likely be interested in investment.

What is the most important thing for investors? ›

Money. It's not hard to see why this one's important because really, this is at the heart of every investment. If your business is without the potential to make money, it is not a business. Ideally, you'll be approaching an investor with a business plan that has your financials worked through.

How does a fund manager add value to a fund? ›

Adding Value: Fund Manager Role

An ideal relationship between fund manager and portfolio company is mutually beneficial, with the fund manager offering unique skills and knowledge to grow the company, increase its IRR, improve the quality and depth of its impact, and lead to positive returns for the fund and its LPs.

What is fund management strategy? ›

It is the systematic process of operating, deploying, maintaining, disposing, and upgrading assets in the most cost-efficient and profit-yielding way possible. A fund manager must pay close attention to cost and risk to capitalize on the cash flow opportunities.

What are the objectives of fund management? ›

The primary objective of fund management is to manage investments on behalf of investors. Besides, some of the other objectives are as follows: Ensure the highest level of safety and stability for the investors by focusing on investment opportunities that offer the right mix of risk and return.

How do you measure the performance of a fund manager? ›

To evaluate the performance of a fund manager for a five-year period using annual intervals would require also examining the fund's annual returns minus the risk-free return for each year and relating it to the annual return on the market portfolio minus the same risk-free rate.

How do you Analyse fund manager performance? ›

Step 1: Determine the sector weights for both the fund and the index. Step 2: Calculate the contribution of each sector for the fund by multiplying the sector weight by the sector return. Repeat for the index. Step 3: Calculate the rate of return for the fund by adding the contribution of each sector together.

What type of personality does a fund manager have? ›

Investment fund managers score highly on extraversion, meaning that they rely on external stimuli to be happy, such as people or exciting surroundings. They also tend to be high on the measure of conscientiousness, which means that they are methodical, reliable, and generally plan out things in advance.

What are the 4 M's that investors look for in a company? ›

Igniting Innovation, Impact & Investing…

Therefore, for both funders and founders, focus on these 5 M's in evaluating any successful entrepreneurial investment: (1) Management, (2) Momentum, (3) Model, (4) Motivation and (5) Market.

What are the four principal concerns of investors? ›

6 Concerns of Investors
1. Domestic Politics UncertaintyStaff turnover, elections, and special counsel investigation
2. International RelationsProtectionism and tariffs
3. EconomyDecelerating manufacturing and service sector growth
4. InflationRising labor and commodity prices
2 more rows
Jul 13, 2018

What do investors look for in a management team? ›

Experience Is Key

"Investors obviously want to see passion, adaptability and good team dynamics. Some want a certain mix of skills. But most importantly, the reality is that most investors willing to open to their wallets want to see a team that's been successful before.

What are the 5 golden rules of investing? ›

The golden rules of investing
  • If you can't afford to invest yet, don't. It's true that starting to invest early can give your investments more time to grow over the long term. ...
  • Set your investment expectations. ...
  • Understand your investment. ...
  • Diversify. ...
  • Take a long-term view. ...
  • Keep on top of your investments.

What is the 5 rule of investing? ›

This sort of five percent rule is a yardstick to help investors with diversification and risk management. Using this strategy, no more than 1/20th of an investor's portfolio would be tied to any single security. This protects against material losses should that single company perform poorly or become insolvent.

What is the 3 5 7 rule of investing? ›

The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction. Too easy? Perhaps, but it's uncanny how often it happens.

What is the 4 golden rule of investment? ›

Rule 4 – Long Term Inflation Average Is 4%

However, over time, inflation will work against your investments.

What is the 10 rule in investing? ›

No More Than 10 Percent Down Payment

Say, for example, that you purchased a property for $150,000. Following the rule, you put $15,000 (10 percent) forward as a down payment. Think of that 10 percent as all the skin you have in the game.

What is the thumb rule for investing? ›

Thumb Rule #1: Rule of 72

In how many years will the money double? According to this rule, if you divide 72 by the expected rate of return, you can get a fairly accurate estimate of the number of years your money can take to double. Hence, you can expect your investment to double in 7.2 years.

What are 3 characteristics to look for when investing in a company? ›

Stable earnings, return on equity (ROE), and their relative value compared with those of other companies are timeless indicators of the financial success of companies that might be good investments.

What are the three 3 key elements of an investment strategy? ›

There are three key factors that determine which investment strategy is right for you.
  • Risk tolerance.
  • Expected returns.
  • Effort required to implement the strategy.

What are the 3 factors that influence rate of return by investors? ›

Three factors affecting the required rate of return are – the real rate of return, inflation premium, and risk premium.

What qualities do investors look in founders? ›

Personality And Motivation. The most important quality of an investment-worthy entrepreneur is that they have a true belief in their company and determination to deliver a big outcome. A successful founder doesn't find building a company to be work; their company should be part of their soul.

What are the 3 criteria that must be meet to be an accredited investor? ›

In the U.S., an accredited investor is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.

What are the common traits of successful investors? ›

Ten Traits of Successful Investors
  • #1: They know their risk tolerance. ...
  • #2: They understand and accept volatility. ...
  • #3: They are decisive. ...
  • #4: They are “actively passive” ...
  • #5: They ask questions. ...
  • #6: They avoid speculation. ...
  • #7: They keep emotions in check. ...
  • #8: They are realists.
Sep 21, 2022

What do investors care most about? ›

More than anything, early-stage business investors want to see a return on their investment (ROI). If you can demonstrate that your business will make them money, then you're 90% of the way there. If your company has been up and running for a while, then you need to show excellent financial performance so far.

What do most investors want in return? ›

Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average.

How can you impress investors? ›

To impress potential investors, develop an innovative idea with significant market value, and consistently articulate its potential for future growth. Balancing both your idea and communication skills will increase your chances of success in investor presentations.

What is the first rule of investing? ›

Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”

What is the core function of a fund manager? ›

An investment manager or fund manager is the individual responsible for managing an investment portfolio on behalf of an investor. He or she is responsible for implementing suitable investing strategies and handling trading activities in the portfolio.

What is a good fund manager? ›

Good fund managers change their strategy

From an organizational standpoint, managers may also restructure investment teams and operational teams to enhance their investment approach. One investor, looking at 30 years of data on managers, pointed out that their skill-sets and sectors change over time.

What are the two core processes in funds management? ›

Funds Management consists of (a) funds control and distribution and (b) budget formulation. Funds distribution starts at the HQDA level. Army funds flow from HQDA down the chain of command to the ultimate user, with users at every organizational level.

How do fund managers decide what to invest in? ›

A portfolio manager will choose the assets to be included in the fund based on its stated investment strategy or mandate. Therefore, an index fund manager will try to replicate a benchmark index, while a value fund manager will try to identify under-valued stocks that have high price-to-book ratios and dividend yields.

What is the four fund strategy? ›

Paul Merriman 4 Fund Portfolio is a simple investment strategy consisting of four low-cost index funds with large caps, small caps, and small cap value. It was designed by Paul Merriman, a well-known financial educator and advisor, as a low-cost, diversified portfolio that individual investors can easily implement.

What are the three major objective of financial management? ›

Objectives of Financial Management

To ensure regular and adequate supply of funds to the concern. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. To ensure optimum funds utilization.

What are some investment goals? ›

10 investment goals to aim for (and how)
  • Buying a home.
  • Having children.
  • Rainy day fund.
  • Retirement.
  • Raising your family.
  • Getting married.
  • A career change.
  • Starting a business.
Dec 22, 2022

What are the three fundamental goals of investment objectives? ›

Safety, income, and capital gains are the big three objectives of investing. But there are others that should be kept in mind when they choose investments.

What does a typical fund manager charge? ›

The management fee varies but usually ranges anywhere from 0.20% to 2.00%, depending on factors such as management style and size of the investment. Investment firms that are more passive with their investments generally charge a lower fee relative to those that manage their investments more actively.

Which fund manager is best? ›

  • SHRIDATTA BHANDWALDAR:Canara Robeco Mutual Fund.
  • GAURAV MISRA:Mirae Asset Global Investment.
  • SHREYASH DEVALKAR:Axis Mutual Fund.
  • HARISH KRISHNAN:Kotak Mutual Fund.
Feb 27, 2023

What is a reasonable financial management fee? ›

In other words, clients should expect to pay a maximum of $50,000 on a $10 million account. Online advisors have shown that a reasonable fee for money management only is about 0.25% to 0.30% of assets, so if you don't want advice on anything else, that's a reasonable fee, says O'Donnell.

Do fund managers add value? ›

Fund managers can add value to their investees at every stage of their relationship and across the investment lifecycle (Figure 16).

Do fund managers take percentages? ›

Management Fees: This fee is calculated as a percentage of assets under management. Typically this equates to 2% but can range from 1% to 4% depending on the fund. These fees are generally paid monthly or quarterly and help pay overhead and daily expenses of running the hedge fund.

Is Warren Buffett a fund manager? ›

In short, Warren Buffett is not a hedge fund manager, and Berkshire Hathaway is not a hedge fund. Buffett is one of the few billionaires who amassed a fortune by building a successful business and managing a stock portfolio simultaneously.

Who is the best fund manager at Fidelity? ›

Morningstar has named Fidelity portfolio manager Joel Tillinghast as its Outstanding Portfolio Manager of 2021. Tillinghast, who holds an A rating with Citywire, beat out three other nominees for the top prize: JP Morgan's Jeffrey Geller, BlackRock's Rick Rieder, and Baird's Mary Ellen Stanek.

What are the disadvantages of using a fund manager? ›

The main disadvantage to investing in managed funds is that there are often below average returns which are amplified because of fees. Investors should be aware that many funds perform so poorly over a long period of time that their yields are below the long term rate of inflation.


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