A beauty contest, in the context of selecting an asset manager, refers to a structured process where multiple asset managers compete in a competitive environment for the mandate of a prospective investor. The goal of such a procedure is to identify the asset manager who best aligns with the investors individual requirements and needs. This process enables the investor to make a well-informed and deliberate decision, based on a structured analysis and a direct comparison of multiple providers (asset managers).

Key Aspects to Consider in a Beauty Contest

1. Preparation / Needs Analysis

• Investor Objectives: The first step is to clearly define the investor’s investment goals and risk tolerance.
• nvestment Horizon: Determine whether the capital is intended for short-term or long-term investment. What are the liquidity requirements? Are there plans for significant investments (e.g., real estate) or known recurring financial obligations?
• Specific Requirements: Some investors may have ethical or sustainable criteria that must be taken into account. Tax considerations or specific fiscal circumstances should also be considered in.
• Evaluation Criteria: Define clear criteria in advance for assessing asset managers (e.g., track record, investment philosophy, risk management, team, transparency, products, and pricing). To ensure comparability and facilitate a ranking, the selected criteria should be structured in a way that allows for consistent evaluation and comparison.

2. Research, Preselection and Support

• Experience and Reputation: Begin by researching asset managers with a strong market presence and a positive reputation.
• Specialization: Assess whether the asset manager has expertise in the desired asset classes (e.g., equities, bonds, alternative investments) or regions (e.g., emerging markets).
• Expertise: Engaging an independent financial expert in the process can be helpful in defining investment objectives without product bias and ensuring an objective selection process.

3. Beauty Contest – Presentation

• Performance Analysis: Candidates present their past performance. It is essential to analyze both absolute and risk-adjusted returns, while also understanding how the (excess) returns were generated.
• Investment Process: Asset managers showcase their investment strategies, decision-making processes, and risk management approaches.
• Team and Resources: A strong team with experienced analysts and portfolio managers can be a significant advantage.
• Client Support: The quality of customer service, reporting, and transparency in communication are also key factors to consider.

4. Analysis and Evaluation

• Track Record: Comparing past performance while considering risks, market phases, and benchmarks helps identify the most suitable candidates.
• Qualitative Assessment: In addition to pure performance, qualitative factors such as personal impressions, communication skills, and the asset manager’s philosophy are equally important.
• Cost Analysis: A thorough evaluation of the cost structure relative to the expected performance is of utmost importance. What are the fees? Are they transparent and competitive within the same range as peers? Transparent disclosure of the advisory philosophy and fee structure is essential.

5. Decision and Implementation

• Decision-Making: A decision is made based on the evaluation framework established at the outset.
• Contract and Fee Structure: Terms are negotiated and formalized in a contract. It is crucial to ensure that fees are clearly defined and indirect costs are transparently disclosed.
• Monitoring: Continuous performance monitoring is essential even after the selection. The asset manager should provide regular reports and make adjustments as market conditions or financial objectives can change.

Key Criteria for Selection

• Transparency and Communication: Open communication and regular, comprehensible reporting are of essential importance.
• Independence: Ideally, the asset manager should be independent and free from conflicts of interest..
• Diversification: For larger portfolios, it is advisable to distribute assets among multiple asset managers to reduce manager risk.

Conclusion
A beauty contest for selecting an asset manager enables investors to make an informed and deliberate decision based on a structured analysis and direct comparison of multiple providers.

An independent investment controller serves as a valuable sparring partner in the selection process, offering structure, in-depth analysis, and objective perspectives. By collaborating with an experienced partner, investors can ensure that their decision is based on a thorough and methodical evaluation.

After having selected the right asset manager, continuous performance monitoring is essential. This ensures that the investment strategy aligns with the defined objectives, risks are effectively managed, and all costs remain in line with the mandate and market standards.