Fri | Sep 25, 2020

Oran Hall | Questions to ask a portfolio manager

Published:Sunday | August 11, 2019 | 12:00 AM

QUESTION: When I just started working, I was motivated by your columns to get my finances in order. It has been three years since I first wrote you and a lot has changed. I finished paying my student loan, switched my pension savings from one pension fund manager to another, and opened a professionally managed personalised investment plan.

My next goal is home ownership and diversifying my portfolio because those feel like the next step to financial stability. The money that I would pay monthly towards my loan is now free, and I am looking at three companies that seem to be in the business of building wealth through investment.

I would like your opinion on what types of questions to ask when selecting one of those companies. Do I need to invest in a product that provides a dividend? Is the stock market doing well enough to start investing now, or is it doing so well it makes no sense to start now? Are any of those companies even going to help with me becoming a home owner?

– Kadeen

FINANCIAL ADVISER: Yours is a beautiful story, and I feel confident that you will continue on the path you have taken and will do well. I like the fact that you know what your next goal is and that you see the merits of having a diversified investment portfolio.

It would be good if you are able to set a realistic time frame within which you would like to own your own home as it would help you be more focused and give you a greater sense of how much to save and invest and the level of return that would be necessary.

You have already entrusted some of your funds to professional investment managers, and it is quite commendable that you now want to invest the funds that have been released now that you have liquidated your student loan.

The companies you have mentioned are all stockbrokers, and it seems that your preference is to allow them to manage the new portfolio you want to set up. Not all stockbrokers offer that service. You should make every effort to know the make-up of your present portfolio so that the new portfolio does not become a mirror image of it.

The benefit of having a second portfolio is that it adds another level of diversification, that is, diversification by management. Different managers have different philosophies and approaches to investing. They also have different interests and competencies, which may be reflected in the research and other services they provide.

Before engaging a new fund manager, you may want to know the following: the services they offer, the kinds of yields they have been able to generate for clients with similar profiles to yours and even yields on other types of portfolios, the nature and frequency of the portfolio reports they generate, the research reports they generate, their fees and the basis on which they are computed, and the minimum sum required to open an account. If the companies have web sites, I suggest you check them first.

A managed fund does not itself generate dividends although the stocks it invests in do. If it is a pooled fund, dividends are generally reinvested. If it is a portfolio customised for a client, whether dividends are distributed to the client or reinvested depends on the arrangement made between the client and the fund manager.

It may be better, though, to reinvest the dividends and interest earned to add to the returns of the portfolio rather than to withdraw and use them for other purposes.

It is true that the stock market has had a very good run and will slow down at some point as markets tend to move in cycles. Entering the stock market now will not, in the short term, likely yield the same level of returns as have been generated in the recent past, but good corporate results will eventually cause stock prices to increase appreciably over time.

If you invest consistently, you will buy at low prices, high prices, and prices in between as prices fluctuate. In the long run, though, you should get good returns.

Whatever the condition of the market, a good investment professional should be able to help you to identify securities that are worth buying.

The companies you mentioned can help you to become a home owner if they manage your portfolio well and if you invest enough to generate the resources required to at least make the deposit and pay the closing costs.

I doubt that they would be able to say within what time they would be able to help you realise your goal considering the many factors that determine the success of an investment programme.

There are several portfolio managers apart from the stockbrokers. Don’t overlook them. I wish you well.

- Oran A. Hall, the principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and