Selecting actively managed investment strategies for all, or a portion, of trust assets can be difficult. Herein we describe the process of identifying superior active managers, and metrics fiduciaries could use to document the prudence of their manager selection process.

This article addresses issues that trustees (and other fiduciaries) of foundations and endowments should consider when selecting actively managed investment strategies for all or a portion of trust assets. The article notes that common law standards of prudent investment generally require fiduciaries to diversify investments and, to the extent practical, minimize costs. Since actively managed strategies typically tend to be both more concentrated and more costly than comparable passively managed (indexed) strategies, a fiduciary selecting an actively managed approach should have some rational expectation that the trust will be adequately compensated for assuming incremental cost and risk. The article describes the difficult process of identifying superior active managers, and suggests metrics fiduciaries could use to document the prudence of their manager selection process.