When choosing an investment manager for a retirement plan, a company must ensure that the manager understands the concerns and objectives for the investment program. Employers also should be confident that the selection was made on relevant and substantive grounds. Therefore, if investment performance is temporarily poor, the sponsor can resist any pressure to change the investment manager or strategy
Employers can narrow the field of investment managers to candidates who are most likely to provide appropriate services. Investment managers can be categorized in a variety of ways.
Equity managers have varying styles. They may choose as passive a strategy as indexed portfolios, or a much more active management approach such as selecting high-growth stocks in particular industries. Most investment managers implement a "top-down" or "bottom-up" approach to equity management. Some even combine the two.
Bond managers also implement varying management styles, ranging from indexed portfolios to aggressive anticipation of interest rate changes. Most bond managers incorporate some form of interest rate anticipation, in which they lengthen or shorten the maturity of the bond portfolio based on their interest rate forecasts and trends.
Balanced fund managers invest in bonds, cash equivalents and possibly other asset categories, as well as common stock. Although they usually keep some money invested in each asset class, they also shift money among categories.
Specialty managers carry out market strategies through asset categories such as real estate, venture capital and international investments.
After an employer selects an appropriate type of investment manager, difficult choices remain. An investment manager's past performance tends to be the focus of a search. While historical rates of return are significant, employers also must consider other pertinent information and outline selection criteria. The following primary concerns should be considered:
(1) The relevance of the management firm's historical record to its current circumstances and the plan sponsor's investment objectives. Prospective clients often are presented with results for funds with different objectives that may have been managed by individuals no longer with the company. Employers should keep in mind that both the level and stability of returns are important, but there is no guarantee that outstanding past performance will be repeated.
(2) The firm's willingness and capability to meet any special needs or objectives. …