Assessing Investment Manager Performance: Three Questions Clients Should Always Ask

We closely monitor the performance of the funds used by our clients and recent market outcomes have been heavily influenced by a narrow group of stocks and styles. This has prompted more frequent and more nuanced conversations with trustees and investment committees about how performance should be assessed, and what actions, if any, should follow. In such an environment, there is a heightened risk of mis-diagnosing style outcomes as manager skill, or lack of it, unless performance is assessed carefully.

Assessing managers is not simply about ranking returns. It requires a structured approach that starts with understanding whether managers are delivering what they promised, then understanding why performance looks the way it does, and finally deciding whether any action is required.

This article sets out three questions that clients should consistently ask when reviewing their investment managers.

1. Have your investment managers performed well?

The first step is deceptively simple, but often poorly framed. Performance should always be assessed relative to what the manager set out to do, not against a generic market benchmark.

In practice, clients should think about performance using a clear hierarchy of comparators:

• The manager’s stated objective or return target, which asks whether the manager has delivered what they were appointed to do.

  
  

• A market composite benchmark aligned to the mandate, which helps assess whether the manager captured the opportunity set available to them.

  
  

• A peer group of genuinely comparable mandates, which helps distinguish manager-specific outcomes from broader style or market effects.

Each of these comparators answers a different question. The objective tests whether the manager is “on brief”, the composite benchmark tests whether they accessed the intended opportunity set, and peer comparison helps identify whether outcomes are specific to the manager or common across the style.

A good starting point is to revisit the manager’s stated investment objective, risk profile, and approach. If a manager targets inflation plus a modest return over a full market cycle, short term underperformance versus an equity index may be entirely consistent with that objective. Inflation-plus targets are only meaningfully assessed over longer horizons and can show large one-year deviations even when a strategy remains on track.

Clients should also consider whether the manager has been assessed over an appropriate time horizon. One year of returns rarely provides enough information. Many investment styles experience periods of underperformance that can last several years, particularly those that prioritise capital preservation or valuation discipline.

Benchmark selection matters. While composite benchmarks can be useful, clients should be cautious where a manager defines a bespoke or “custom” benchmark. Such benchmarks can unintentionally embed the manager’s active bets. The benchmark should represent the neutral opportunity set, not the portfolio itself.

Peer comparison can add further insight, but only if it is done carefully. Comparing a manager to genuinely comparable peers with similar mandates, constraints, and styles can help determine whether an outcome reflects manager decisions or broader conditions affecting that style.

Most importantly, performance should be judged in the context of expectations. A manager delivering low or even negative returns may still be performing as expected if market conditions are hostile to their approach. Consistency with stated philosophy and risk discipline is often more important than absolute or relative returns at a single point in time.

2. Do you understand why the manager performed well or not well?

Once performance has been measured, the next question is whether it can be explained. Understanding the drivers of return is critical to making good decisions, and explanations should be evidence-led and quantified wherever possible, rather than relying solely on qualitative narrative.

A helpful test is to ask how much of the relative return can be explained by known, measurable exposures, and how much remains unexplained. These exposures typically include style, sector and regional positioning, portfolio concentration, currency effects, and structural tilts such as equal weighting versus market capitalisation weighting.

Clients should therefore ask what actually drove performance. Was it asset allocation, stock selection, sector positioning, or currency exposure? Was performance driven by a small number of holdings, or was it broadly distributed across the portfolio? Clear attribution helps distinguish between outcomes driven by intentional positioning and those driven by manager skill or execution.

It is also important to assess whether the manager behaved as expected given the market environment. Certain strategies are designed to protect capital during market stress but may lag sharply rising markets. Others thrive when liquidity is abundant and struggle when financial conditions tighten. Neither outcome is inherently good or bad if it aligns with the role the manager plays in the overall portfolio.

Benchmark choice plays a central role in this analysis. Many fundamental, concentrated and often more equal-weighted portfolios have underperformed broad market capitalisation weighted indices in recent periods because returns were heavily driven by a small number of very large US technology stocks. In these cases, clients can assess how much of the performance gap is explained by this structural difference by comparing returns to an equal weighted global equity index or another benchmark that better reflects the manager’s opportunity set. This helps identify whether underperformance is largely explained by known exposures, or whether there are additional issues that require scrutiny.

Where ethical or values-based exclusions apply, clients should seek the same level of rigour. Rather than accepting generic statements that portfolios were “hurt” by exclusions such as fossil fuels, managers should be asked to provide an explicit estimate of the impact of those exclusions on returns. Only once that impact is quantified can any remaining shortfall or outperformance reasonably be attributed to investment skill, process, or implementation.

Clients should be cautious of explanations that rely on hindsight or narrative convenience. A credible manager should be able to clearly and consistently explain what drove outcomes, how much can be explained by measurable exposures, and where genuine value added or detracted, without changing their story to fit recent performance.

3. Now that you understand performance, do you need to do anything about it?

The final question is the most difficult, and often the most consequential. Not all underperformance requires action, and not all strong performance should be rewarded with increased allocations. What matters is having a clear, disciplined decision framework once performance has been properly understood.

This mirrors the approach we have set out recently in an article on the Knowledge Hub when advising trustees on how to respond when an asset manager undergoes a merger or acquisition. In both cases, once the review is complete, there are typically three broad and defensible paths: retain the manager, wait and monitor, or initiate a change. Each can be the right answer depending on the circumstances.

It can make sense to retain the manager when the investment engine remains strong, the team is stable, and there is no evidence of a breakdown in process or discipline. An underperforming period may be entirely consistent with the manager’s style, particularly where the reasons for underperformance are well understood and aligned with their stated approach. In these cases, continued monitoring is essential, with particular attention paid to team stability and any subtle changes in risk behaviour.

A wait and monitor approach can be appropriate when early indicators are inconclusive. This path requires discipline. Clients should agree in advance what evidence would demonstrate improvement or deterioration, such as stabilisation of performance relative to appropriate benchmarks, clearer attribution of returns, or evidence that recent changes to process or team are having the intended effect. Without clear criteria, waiting risks becoming passive rather than purposeful.

Clients should consider changing a manager where there is clear evidence of a breakdown in process, discipline, or team stability. This may include persistent deviation from stated strategy, unexplained increases in risk, loss of key personnel without a credible succession plan, repeated failure to meet objectives across different market environments, or significant headline or reputational risk. In such cases, an interim passive allocation can provide breathing space while a full re-tender is conducted.

Importantly, decisions should be driven by long-term objectives rather than short-term performance pressure. Selling at the point of maximum discomfort can lock in poor outcomes and undermine diversification. Equally, retaining a manager should be an active decision, supported by clear evidence that they continue to do what they say they do, that their role in the portfolio remains relevant, and that their approach is likely to be rewarded over a full cycle.

In practice, the key question is often not whether a manager’s performance will eventually recover, but whether you want your organisation to remain exposed to that journey. Clear governance, pre-agreed decision criteria, and ongoing review are essential to answering that question well.

Conclusion

Effective manager assessment requires more than looking at performance tables. Clients should focus first on whether managers are delivering against their stated objectives, then on understanding the drivers of returns, and finally on making disciplined decisions about whether any change is required.

In an environment of concentrated market leadership, this structured approach is more important than ever. Clear thinking, appropriate benchmarks, and patience with well understood strategies are often the hallmarks of strong long term governance.