What Level of Resources to Devote to Investment Portfolio Management?

In general, the more money being managed the more resources dedicated to its management.  An individual with few assets simply outsources the management by putting it in a fund; whereas people with more monies get specific advice from a retail financial planner and very rich individuals often create their own family office (which is essentially a dedicated team of skilled professionals employed to manage their investments on a full-time basis).

The same general approach is taken by businesses. Those small businesses with few surplus funds (like Amicus 🙂) simply hold it in a bank account; whereas the CFO of a medium sized organisation may seek help from an external advisor.  A larger organisation nearly always manages the company’s monies in-house as part of dedicated treasury function with experienced professionals reporting to the CFO.

The stages at which commercial entities move through the different phases is generally determined by calculations of the additional returns they can expect by committing more resources to the management of their monies. The larger the return the greater the degree of internal control the organisation should exercise and the more time and effort it should devote to the task.  Commercial organisations typically expect to make two to five times their money on additional resources allocated.

Within Amicus’ client base of conservative investors, we typically see most organisations make 30bps over a default strategy of simply rolling term deposits by devoting a moderate amount of staff time to managing their investment portfolios and up to 60bps for those that devote higher levels of resources.

Assuming a maximum potential return of an extra 60bps per annum can be made from more efficient management of a conservative investment portfolio, this suggests for an organisation with a portfolio of $10,000,000 an extra $60,000 per annum can be gained through better management and therefore a budget of $12,000 to $30,000 to pay for the resources to achieve this goal is appropriate. 

In practice, these additional resources could take the form of a re-allocation of the responsible staff member’s duties so that he or she can devote more time to the management of the investment portfolio and less to other tasks that have lower valued added functions. It could also mean raising the salary of the investment portfolio management position to attract employees with more skills or experience in the investment area or to keep current employees in the role for longer.  An alternative strategy could be outsourcing the management of the portfolio to an external advisor.

If the size of the portfolio is $100,000,000 then the potential returns rise to $600,000 and the additional resources that should be made available also go up by a factor of ten to between $120,000 to $300,000.  At this level of different of returns and portfolio risk, the investment management should almost certainly be taken in-house as is the case with larger commercial organisations.  The organisation should have at least two staff members where managing the investment portfolio is the major part of their roles.  It is almost always prudent to also employ an external advisor. However in contrast to the previous example, this external advisor should be advising the organisation’s staff at a strategic level rather than the organisation having outsourcing the management of the portfolio to the advisor.  Employed staff should exercise far greater controls and all the investment functions should be handled in-house for greater efficiencies and better risk management.  Internal staff should be well trained and have superior investment management skills and experience.  A level of dedicated systems should also be considered.

Comparing and contrasting its commercial clients with those in the public service, Amicus finds the resource allocations amongst commercial clients generally follows the model above. However amongst its public service clients, many tend to under-resource their investment portfolio management functions.  Amicus looks to address this issue by seeking to advise its clients’ staff, upskilling them to take more tasks in-house and providing them with the tools and education to improve their own investment decision making processes.

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