He takes on a dozen, keen, unnaturally good looking, usually young and ambitious individuals, he sets them challenges and he watches them perform. Then, one by one, he fires them. The last one standing becomes his apprentice. It’s a simple, low cost, low risk process.

In real life, business decisions are rarely that clear cut or free of consequence.

One such decision, laden with consequence and far from clear cut, which trustees face almost all of the time, is when to fire a fund manager.

The problem is this; we hire investment managers to produce a return and, unless they are a passive manager, that means they are likely to underperform from time to time. How do you tell when a short term period of underperformance is likely to become a long term period of underperformance? And, in so far as you can spot that switch point, when is then the best time to fire them?

There are no easy answers to these questions, but there are some guidelines, some things to think about.

Firstly, what’s the cost?

Firing a fund manager should not be an arbitrary act. There should be motive and intent. There are costs, both direct (for example, for advice, the mechanical process and the direct costs of buying and selling an underlying asset such as bid to offer spreads and stamp duty) and indirect (for example, out of market loss) in moving money around the system. The decisions to fire should be taken with the aim that these costs will be recovered through a more appropriate future return.

Have the objectives changed?

While it’s fairly rare, although not unheard of, for a fund manager to change the objective of their fund so it becomes inconsistent with your purpose, it is extremely common for your objectives to change. In a DB scheme, the liabilities may mature. In a DC scheme, the membership profile or the target objective may change – an example of the second was the introduction of freedom and choice that rendered most annuity targeting default investment strategies redundant.

In this context, there are only really four things to think about: what return do you want, what amount of risk are you prepared to accept, how liquid do you want your investment to be (or, to put it another way, what duration do you want) and how much are you willing to pay?

If any of these things change, your objectives have changed and so too should your investment strategy. When this happens, your need for certain fund managers also changes.

Have you considered the right benchmark?

Underperformance is a relative thing; to underperform there has to be something to be under – a benchmark. And there are lots of benchmarks that your fund manager could be under, or indeed, over.

Their underperformance could be down to them, or it could be down to the benchmark you have set them. In other words, are you measuring them against the right benchmark?  

Are they taking more risk than intended?

In a similar vein, they could also be out performing, or over, their benchmark. While not ignoring the question above (i.e. is the benchmark right) out performance can be just as bad as underperformance as it hints that too much risk being taken.

What time frame do you want them to perform to?

Relativity also implies a time frame. A fund manager may underperform his benchmark for 20 minutes, a day, a month, six months, a year, five years or any other period of time. Before deciding to fire, you need to ask whether you’re considering the right timeframe.

As a rule of thumb, and assuming the benchmark is correct, three months or less under performance is probably not important, while three years or more underperformance is probably always important.

Has a big rock shifted?

Things happen; big things and small things. Most small things (say, a change in a relationship manager) can be ignored but most big things need to be considered. If the principle fund manager leaves, if there’s a change in owner or if there’s been a significant regulatory breach are all big things. Consideration, however, is not the same as making the decision to fire. It’s merely the first step.

What are the total costs of investment?

Increasingly there is pressure for fund managers to be transparent about the total costs of investment. Some are responding to this, some aren’t.

If yours isn’t you might want to understand why.

And finally, what’s the cost of indecision?

It is difficult to make decisions, but sometimes being indecisive can be just as damaging. If, having considered all of the above, your gut is telling you the time is right; don’t be afraid of pointing your finger at your fund manager and telling him, in true Alan Sugar style, “you’re fired”.