How Do Institutional Investors and Investment Consultants Evaluate Asset Managers?

As an asset manager, understanding how institutional asset owners and investment consultants evaluate you is crucial to your success. In this article, we break down the key factors they consider during their evaluation process, offering insights into how you can meet—and exceed—their expectations.

How Do Institutional Allocators and Investment Consultants Evaluate Asset Managers?

Institutional allocators and investment consultants evaluate asset managers based on their investment strategy and process, performance consistency, team stability and longevity, risk management practices, and operational transparency. They look for managers who demonstrate a strong, stable approach aligned with investor goals and desired outcomes—ensuring reliability and trustworthiness in managing capital.

Key Takeaways

• Asset managers must maintain a consistent investment strategy and process and deliver reliable performance to meet expectations.
• A stable and experienced investment team is crucial for gaining the trust of allocators and consultants.
• Demonstrating a robust risk management framework can differentiate asset managers during evaluations.
• Robust operational processes are essential for building trust.
• Offering competitive fee structures aligned with investor interests can make asset managers more attractive.

Build a Compelling Narrative Around Your Strategy

Institutional asset owners and investment consultants place significant emphasis on how well asset managers deliver on their promises. They expect not only returns, but performance rationalized by a strategy and process that aligns with their investment goals. Understanding the investors’ needs and your strategy’s value proposition within that framework is key. This section delves into how your performance, strategy, and process are scrutinized and what you can do to ensure you meet the highest standards.

Putting Performance in Context

Your performance is always in the spotlight, but allocators don’t look at just returns. They delve into the specifics—how the stated investment philosophy is executed in practice, risk relative to returns, and how well your strategy performs against relevant benchmarks and peers. Be prepared to explain the thought process behind specific investment decisions and to speak to your performance across differing market regimes.

Maintain a Consistent Investment Strategy and Process

Consistency in your investment strategy and process is non-negotiable. Allocators and consultants want to know that you’re delivering what you promised, without unforeseen deviations. Make sure your strategy is well-articulated and that past investment decisions align with your stated process. Highlight the strength and empowerment of your portfolio management team—this reassures potential investors that their capital is in capable hands.

Additionally, risk management is a crucial area where you can distinguish yourself. Demonstrate how your risk management framework integrates into your overall investment process and how it has been tested during market stress.

Offer Competitive Economics to Attract Institutional Investors

Fees are more than just numbers—they reflect the value proposition you offer to institutional investors. Allocators and consultants scrutinize management fees, performance fees, and other charges, looking for competitive economics that are aligned with their interests. Consider offering fee arrangements that reward long-term commitments or strong performance. Performance-based fees, such as fulcrum fees, or agreements regarding the treatment of investors, such as most-favored-nation clauses, can demonstrate your willingness to align your interests with those of your clients. Below we show average management fees for large cap equity strategies based on mandate size. Having an understanding of the marketplace, particularly one as competitive as asset management, is critical to offering competitively priced products.

Manage Capacity Constraints and Liquidity

Overextending your strategy can be detrimental. Investors can be sensitive to whether your strategy is sized appropriately for its investment universe. Furthermore, investors need to ensure that they can exit positions if necessary, so they closely examine the terms for capital allocation and redemption as well as the liquidity profile of the underlying portfolio. Be transparent about any liquidity constraints and how you manage them to protect both your strategy’s performance and your investors’ ability to redeem their capital.

Strengthening Your Team for Long-Term Success

The strength of your investment team is a key determinant of your firm's success in the eyes of institutional allocators and consultants. A knowledgeable, experienced, and stable team signals that your firm is well-managed and capable of navigating complex markets. This section examines how the experience, stability, and structure of your team are evaluated, and why maintaining a cohesive and motivated workforce is essential for long-term success.

Leverage Team Experience and Knowledge

Your team is your greatest asset. Allocators and consultants evaluate not just individual credentials, but how your team functions as a cohesive unit over time. Highlight the depth of experience on your team and how that experience translates into effective decision-making. Showcase examples of your team’s success in navigating complex market environments or seizing unique opportunities.

Ensure Team Stability to Build Investor Confidence

High staff turnover is a red flag. Investors seek stability, as it indicates a well-managed, content team. If your firm has experienced turnover, proactively address it. Explain the steps you’ve taken to stabilize the team and reassure your clients that these changes won’t impact your investment process.

Mitigate Key-Person Risk in Your Firm

Mitigating key-person risk is essential. Investors want to know that your firm won’t be destabilized if a key team member leaves. Develop and communicate a clear succession plan or a team-based approach to decision-making that minimizes reliance on any one individual.

What is Key-Person Risk?

Key-person risk refers to the potential financial or operational harm that a business or investment fund may face if a key individual, often a top executive, portfolio manager, or founder, becomes unable to perform their duties due to departure, death, or incapacitation. This risk is particularly significant in firms where one or a few individuals are crucial to the firm's success, such as those who possess unique skills, relationships, or expertise that are not easily replaceable.

In the context of asset management, key-person risk is a concern for institutional allocators and investment consultants because the departure of a key person can disrupt the investment strategy, negatively impact performance, and lead to instability within the firm. To mitigate this risk, firms often implement key man clauses in contracts, which may trigger specific actions, such as suspending new investments or returning capital to investors, if a key individual leaves the firm. Additionally, having a clear succession plan and fostering a strong, cohesive team can help reduce key-person risk.

Building Trust for the Long-Term

Trust is critical, particularly for allocators and consultants underwriting new manager relationships. Firm soundness and strong operational infrastructure provide the foundation for trust and reliability, which are non-negotiable in today's market. This section explores the vital components of firm management and investment operations and how they contribute to your credibility as an asset manager.

Ensure Effective Firm Management

The overall management of your firm is of paramount importance to allocators and consultants. They want to invest with firms that demonstrate strong leadership, clear investment strategies and business plans, and a commitment to growth. All of these components are scrutinized by investors to ensure they are entering into a fruitful long-term partnership.

Investors are keenly interested in your firm’s management. Changes at the top can create uncertainty, so it’s important to maintain a strong, stable leadership team. If there have been changes, communicate how they enhance your firm’s ability to manage investments and support long-term growth.

Develop a Sustainable Business Plan

Your business plan should demonstrate sustainability and growth. Investors look for signs that your firm is thriving—not just in terms of assets under management and performance, but also in your strategic direction. Ensure that your compensation structures align with the interests of your investors and internal stakeholders. Show how your firm’s growth will enable better service without compromising the integrity of your investment process.

The Importance of Robust Operations

Strong administrative processes are a safety net and investors typically demand third-party administration and custody of assets. Ensure that your audit, tax, and legal processes are transparent and robust. This might not be your primary focus, but it’s a critical area where lapses can lead to disqualification.