Who should manage your investments? My top three criteria for selecting your manager

Investing is personal. Yes, very personal.

That's because all investing involves risk. And the perception of risk is always subjective, and therefore personal.

And when it comes to matters that are personal, don't we owe it to ourselves to be mindful?

While most of you will nod yes, I am willing to bet that a majority of investors, many of whom are undoubtedly smart and accomplished individuals, have not thought through the question of who should manage their investments.

To me, this is one of the most important questions you could answer for your and your family's fortunes.

What follows is my attempt at answering this one. The original note was dated May 2014, the following version is dated November 2016. And while I am sharing this on social media for the first time in 2019, I believe that the underlying principles are simple and timeless.

So here we go. My top 3 criteria for selecting an investment manager.

1. Co-investment

My investment manager must co-invest with me. Must, not may. Let that sink in.

This obvious and simple-but-not-easy criterion alone would eliminate a majority of investment managers out there.

According to a September 2016 Financial Times and Morningstar publication, half of the 15,000 mutual funds in the US are run by managers that don’t invest a single dollar of their personal money.

Some of the largest investment managers globally - Vanguard, BlackRock, State Street and T. Rowe Price in the US; and Schroders and Aberdeen in Europe - have some of the lowest levels of portfolio manager investments in their own funds.

2. Significant Co-investment

On the surface, this appears very similar to the first criteria. But allow me to take this one level deeper.

Many institutional investment managers know that investors would want them to eat their own cooking. Hence, they try to game the co-investment criteria by having a token amount invested in their own funds.

And while that dog-and-pony-show may work for the average investor, it hardly fools the prudent, discerning one. After all, having 1% of my investment manager's net worth riding with over 50% of mine isn't exactly comforting for me.

So while I don’t have a mathematical formula to specify what significant means, its directional meaning seems pretty clear to me. Whether it is a high proportion of the investment manager’s net worth or whether it is a substantial amount on an absolute basis is secondary to me.

3. Fiduciary DNA

While a fiduciary is required by law to put their clients’ interest before their own, a fiduciary DNA is more a trait of character than that of the law. Simply put, think of this as the equivalent of human integrity. It's not optional.

Note that the concept of a fiduciary is not new. In fact, it has been around for ages.

In the recent past, especially after the 2008 global financial crisis, it has started to gain more acceptance. That said, I believe it is virtually non-existent in countries with nascent financial intermediary markets such as India.

That's it, these are the top 3 criteria I'd use to screen my investment manager.

Once one truly meets these criteria, it is likely that they’re authentic and they’re passionate about managing investments, which in turn improves the likelihood of them being good at their profession.

Remember, while it is likely, it is not a guarantee, so please tread carefully.

And remember, investing is personal. So, please spend the time and energy to know who you are. And then choose mindfully.

After all, its your and your family's fortunes we are talking about. If that's not personal, I don't know what is.

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Kunal Mashruwala is a global investing practitioner and owns Mash Capital, a SEBI-registered firm that manages India's only* Global Multi-Asset portfolio. Please feel free to reach him at info@mashcap.com. Standard disclaimers apply.