Delegated investment solutions refer to financial services where investors delegate the management of their investment portfolios to professional asset managers. This approach is becoming increasingly popular among both individual and institutional investors for several reasons. By working with experienced investment managers, investors can gain access to sophisticated portfolio management expertise and advanced risk management techniques. At the same time, delegating investment decisions lifts a significant burden off the shoulders of investors, allowing them to focus on other priorities. When structured properly with clear objectives and oversight, delegated investment solutions can generate strong risk-adjusted returns over the long run. This article will explore the core benefits of delegated investment management and provide recommendations on how investors can implement successful partnerships with asset managers.
Delegated investment enables access to advanced portfolio management capabilities
Many individual investors and even small institutions lack the advanced analytical tools, market data feeds, trading infrastructure, and specialized human capital required to implement sophisticated investment strategies. By delegating portfolio management to seasoned asset managers, investors can gain exposure to institutional-grade portfolio construction, tactical asset allocation, manager selection, risk management, and other advanced techniques.
Outsourcing investment functions reduces demands on investors
For investors with limited time, expertise or interest in managing their own portfolios, delegated investment solutions deliver huge efficiencies. Outsourcing investment management lifts the burdens of security selection, trade execution, portfolio monitoring, and recordkeeping off investors’ plates. This allows them to focus attention on their core business operations or other higher-value activities.
Oversight and incentives alignment are critical for successful partnerships
While delegating investment functions has major advantages, it also requires investors to cede control and introduces potential principal-agent problems. To mitigate these issues, investors should put great care into manager selection, maintain clear reporting requirements, and structure performance-based fee arrangements that align incentives between the investor and asset manager.
Customization provides flexibility to meet specific investor needs
The wide range of investment managers and portfolio solutions available today allows for extensive customization to match delegated portfolios with each investor’s specific objectives, risk tolerance, liquidity needs and responsible investing preferences. Constructing a personalized portfolio framework upfront ensures alignment across all parties.
By tapping into external asset management expertise while retaining oversight of investment activities, delegated investment solutions offer investors an attractive approach to unlocking portfolio performance. Careful manager selection, governance and incentive alignment are key to ensuring successful outcomes.