Choosing a stock market portfolio manager involves evaluating three key principles: performance returns, risk-return ratio, and fees. These ensure the manager aligns with your investment strategy while maximizing profits and minimizing risks.
Independent investing demands significant time, which not all investors can commit. Many opt for professional portfolio management on the stock market, entrusting funds to experts. Follow these three principles to select the right manager.
Principle #1: Performance Returns
The primary goal of a portfolio manager is to generate profits matching your preferred strategy.
For an aggressive strategy:
- Compare the manager’s annual returns over several years to bank rates, assessing the return premium and if it suits you.
- Check if the manager outperforms a ‘buy and hold’ strategy using index stocks.
- Compare the manager’s returns to the Moscow Exchange total return index dynamics, available on the official site.
If the manager’s returns lag the index, it may reflect lower risk and smaller drawdowns, making it viable.
Principle #2: Risk-Return Ratio
Compare the manager’s maximum drawdown to the index’s over the same period. Calculate the risk coefficient by dividing returns by maximum drawdown to see if risks exceed the index.
Calculations show the index yielded 1.5% return per 1% risk, while the manager delivered 3.5%. Investing with the manager proved more advantageous than the index.
Lower returns may indicate reduced risks, as shown here:
For conservative investors, a manager with lower returns but smaller drawdowns is ideal.
Principle #3: Fee Structure
Managers charge annual fees: a percentage of assets under management plus a success fee on profits. Add 13% income tax for residents.
Investor profit formula: Investor Profit = Manager Returns – Fees – Income Tax
Selecting a manager demands responsibility to secure profits and save time.
FAQ
What is the main factor in evaluating a portfolio manager’s performance?
Compare annual returns to benchmarks like bank rates and market indices, ensuring they match your risk tolerance.
How do you calculate risk-return ratio for a manager?
Divide returns by maximum drawdown and compare to the index; higher ratios indicate better efficiency.
What fees should you consider with a portfolio manager?
Account for assets under management fees, success fees, and 13% income tax to compute net investor profit.
