What qualifications should you look for in a portfolio manager?

Global perspective
Managing an investment portfolio effectively is more challenging than ever: The United States no longer dominates the world economy or world trade. Over the past five years, the dollar has lost a quarter of its value against other major currencies. The future of the U.S. dollar as the premier international currency is in jeopardy. In future years, the value of the dollar against other currencies will continue to fluctuate.

Growing demand for and dwindling supplies of energy and other resources will continue to put pressures on commodity prices, governments and economies.

To be effective today and into the future, a portfolio manager must have a global perspective— one that takes into account how political developments and technological trends will affect the growth of economies, the profitability of companies, the prices of commodities and the strengths of currencies. To be effective today, a portfolio manager must view investments in any economy— the U.S. included— in the context of global trends, cycles and developments.

Attention to preserving your wealth's purchasing power
Not only does the decline of the dollar against other currencies erode your wealth's purchasing power, so can inflation within U.S. economy. Your portfolio manager must find ways to protect your wealth against declines in purchasing power.

Market savvy, psychological poise, skeptical open-mindedness
The world’s financial markets continue to grow more volatile and interconnected. Financial markets are auctions. They are auctions in which bid and ask prices reflect participants’ expectations about the future. Any event or development that affects people’s expectations can affect market prices.

To be effective, a portfolio manager needs the market savvy to recognize the danger signals of irrational exuberance. He or she needs the psychological poise to see when the herd may be chasing a mirage or in danger of running off a cliff. He or she needs the open-mindedness to recognize the investment possibilities of new technologies balanced by the skepticism to know that, when something seems too good to be true, it probably is.

Wisdom beyond the conventional
Conventional wisdom and many financial advisers claim that the financial markets are efficient and every investor would be better off in an index fund. The exceptional portfolio manager knows that, if markets were truly efficient, they would not go into bubbles.

Recent bubbles in technology stocks and the housing market show that the financial markets are not truly efficient. Hence, index funds guarantee neither rational investments nor wealth preservation.

As the value of the dollar has fallen over the past five years, investors in dollar-based index funds have taken significant hits in the global purchasing power of their wealth.

The next time one of your friends at the club says, "I'm in an index fund. That's the smart thing to do," you might want to say, "Being in an index fund doesn't keep you out of a bubble. Being in an index fund doesn't protect your purchasing power."

Ability to translate global perspective into investments that work for you— your situation, your goals, time horizon and personality
While a portfolio manager needs the informed perspective to evaluate the likely reaction of financial markets to world developments, he or she is not managing money in the abstract. He or she is managing your money— your wealth.

To manage your wealth effectively, a portfolio manager must have the sensitivity and interpersonal skills to relate global developments and market behavior to your personal situation, individual goals, investment horizon and appetite for risk. If your primary goals are preservation of wealth and preservation of purchasing power and your portfolio manager’s goal is to turn a little wealth into a lot of wealth as quickly as possible, most likely you will be exposed to far more risk than you can tolerate— psychologically or financially.

If your portfolio manager has a three-month investment horizon and you have a twenty-year investment horizon, you are likely to be in for a bumpy ride.

Focus on after-tax returns
If one of your goals is to control your incursion of capital-gains taxes, then your portfolio manager needs the administrative infrastructure and skill to take into consideration the tax basis and holding period of every security in your portfolio.

When you choose a portfolio manager, think about the challenges of managing investments in a dynamic, global economy. Find out if the person and the firm you are considering has the qualifications, the perspective and the skills to meet those challenges.