he investment industry spends a huge amount of time on mandate searches and manager selection. But what about after you have hired a manager or selected a manager for a recommend list? What is the right amount of ongoing due diligence?
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Q2 hedge fund letters, conference, scoops etc
Ongoing monitoring of fund managers is a key activity of any manager research team looking to control investment outcomes and fulfil fiduciary duties. Over 850 institutional investors and investment consultants globally rely on eVestment data as part of their investment process and eVestment’s webinar, Minimizing Manager Risk Through Effective Monitoring, explores this topic in-depth.
Here are four tips for asking deeper questions about whether your fund manager is doing what they said they would do.
1. Make monitoring regular, frequent and continuous
When overseeing large sums of money, you have a duty to keep a close eye on your organization’s investments and fund managers. Do you have all the information you need on a regular basis? What regular reports do you use to ensure the portfolio is on track? Are you confident you have the full picture at any given time to report to the board or other stakeholders? Monitoring on a regular, frequent, and even continuous basis can help you maintain confidence in your investment decisions.
2. Look beyond returns
Quantitative monitoring enables you to look at the manager with the same metrics you may have initially screened on. However, it’s important to look beyond performance. What about tracking error, or risk statistics? Is the manager making large bets versus the benchmark? How is the manager positioned to capture future returns? Addressing these types of questions through side-by side comparisons like that shown in Figure 1 can help you avoid negative surprises if the portfolio changes over time.
Figure 1: Comparing strengths and weaknesses of strategies
3. Assess qualitative factors
Material changes to the people or processes at a fund firm can cause problems for manager selection teams. Do you leave it up to the fund manager to alert you when a portfolio manager or key analyst leaves? How do you judge if turnover is positive or negative? Are there risks beyond the immediate investment risks you may be missing? Changes to portfolio concentration and asset levels can have negative consequences even if performance is satisfactory, so balancing qualitative factors against quantitative metrics is critical.
4. Compare managers and benchmark against other investors
Measuring fund managers against benchmarks is helpful but comparing against peers is an even higher standard to apply. Understanding where a manager’s past performance sits in interquartile ranges is common but how is your manager positioned for the future compared to peers? How do your fees compare to industry benchmarks? In addition, it can be helpful to compare your organization’s investment performance relative to other institutional investors or investment consulting firms. These types of comparative questions can highlight new opportunities or give you confidence in keeping the status quo.
Figure 2: Comparative monitoring against peer strategies
Monitoring to achieve outperformance
Success is often measured in manager outperformance, achieving investment objectives for return expectations and meeting cashflow obligations. Effective monitoring is crucial in all these areas and if done well, offers the best chance of ensuring that a chosen fund manager will achieve the desired results.
Article by eVestment
