6.1 The Manager Selection Process

Selecting appropriate investment managers is essential for successful portfolio implementation and requires comprehensive due diligence.

The Manager Selection Process:

  • Step 1: Define Investment Mandate:

    • Clarify investment objectives and constraints

    • Specify asset class, style, and strategy

    • Establish performance expectations and benchmarks

    • Define risk parameters and guidelines

  • Step 2: Identify Candidate Managers:

    • Screening based on strategy and style

    • Quantitative screening criteria

    • Consideration of constraints

    • Alignment with investment objectives

  • Step 3: Quantitative Analysis:

    • Performance metrics and statistics

    • Risk analysis and measurement

    • Style consistency evaluation

    • Peer group comparison

    • Factor analysis and attribution

  • Step 4: Qualitative Analysis:

    • Manager experience and team

    • Investment philosophy and process

    • Operational infrastructure

    • Compliance and regulatory history

    • Client service and reporting

  • Step 5: On-Site Visits and Interviews:

    • Meet with investment team

    • Review operational processes

    • Assess culture and stability

    • Validate investment approach

  • Step 6: Investment Committee Review:

    • Comprehensive review of findings

    • Assessment of fit with portfolio

    • Final selection decision

    • Implementation plan

  • Step 7: Ongoing Monitoring:

    • Performance review and evaluation

    • Staff changes and continuity

    • Strategy drift assessment

    • Regulatory updates and issues

    • Client service evaluation

Manager Evaluation Criteria:

  • Performance:

    • Historical performance and consistency

    • Risk-adjusted performance measures

    • Peer group comparison

    • Performance through market cycles

  • Investment Process:

    • Research and analysis approach

    • Decision-making and execution

    • Risk management and oversight

    • Performance measurement and evaluation

  • Organization:

    • Team stability and depth

    • Firm stability and resources

    • Culture and alignment

    • Succession planning

  • Operations:

    • Technology and infrastructure

    • Compliance and regulatory

    • Client service and reporting

    • Fee structure and costs

6.2 Operational Due Diligence

Operational due diligence assesses the non-investment aspects of a manager, including operations, compliance, and risk management.

Operational Due Diligence Areas:

  • Business Operations:

    • Business continuity planning

    • Technology and systems

    • Personnel and staffing

    • Disaster recovery

  • Compliance and Regulatory:

    • Regulatory history and compliance

    • Code of ethics

    • Personal trading policies

    • Anti-money laundering procedures

  • Risk Management:

    • Risk management policies

    • Position limits and risk controls

    • Independent risk oversight

    • Stress testing and scenario analysis

  • Service Providers:

    • Custodian and administrator

    • Auditor and legal counsel

    • Prime broker and counterparties

    • Third-party service providers

Due Diligence Process:

  • Information Request:

    • Comprehensive questionnaire

    • Document collection and review

    • Regulatory and compliance review

    • Financial and operational review

  • On-Site Visit:

    • Meeting with management

    • Review of operations

    • Assessment of culture

    • Verification of information

  • Reference Checks:

    • Client references

    • Service provider references

    • Industry contacts

    • Regulatory checks

  • Ongoing Monitoring:

    • Regular updates and reviews

    • Performance monitoring

    • Compliance monitoring

    • Risk management oversight

6.3 Investment Manager Monitoring and Review

Ongoing monitoring ensures that managers continue to meet expectations and remain appropriate for the portfolio.

Monitoring Process:

  • Performance Monitoring:

    • Quarterly and annual performance reviews

    • Comparison to benchmarks and peers

    • Risk-adjusted performance evaluation

    • Attribution and factor analysis

  • Style and Strategy Monitoring:

    • Style consistency and drift

    • Portfolio characteristics and holdings

    • Risk factor exposures

    • Process and execution

  • Organization Monitoring:

    • Staff changes and turnover

    • Firm stability and resources

    • Regulatory and compliance updates

    • Business developments and changes

  • Risk Monitoring:

    • Risk management practices

    • Portfolio risk metrics

    • Operational risk assessment

    • Incident and issue review

Review Triggers:

  • Performance Issues:

    • Significant underperformance

    • Inconsistent performance

    • Risk-adjusted performance decline

  • Organizational Changes:

    • Key personnel departures

    • Firm ownership changes

    • Strategy or process changes

  • Compliance Issues:

    • Regulatory actions

    • Compliance violations

    • Ethical concerns

  • Risk Issues:

    • Excessive risk-taking

    • Risk management failures

    • Operational issues

Manager Termination Considerations:

  • Performance issues

  • Organizational changes

  • Strategy drift

  • Compliance issues

  • Fee structure changes

  • Portfolio fit changes

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