Good investment managers can be hard to find. While individual investors may move from one investment to another with relative ease and (hopefully) not lose too much in the process, an advisory firm’s reputation is often tied directly to selection of the right investment option, making an investment manager a particularly important decision.

At Carson, our investment manager due diligence starts with understanding the six P’s. I say “starts with” because this is not the entire process by any means, but it is a way to build a strong foundation for making the right selection for our clients and our partners.

1. People

We do a deep dive to understand the manager’s team – credentials, experience, how long the team has been together. We also want to get a clear picture of how the team works together to implement the investment process and how they are motivated.

The most cohesive teams have often worked together for many years and step in to back each other up at critical points in time and provide seamless support. So, we are looking to answer specific questions, such as “Have they cultivated a strong culture?” and “Are they managing their team wisely?”

2. Philosophy

For overall investment philosophy, we are interested in how they approach three core areas:

  1. Portfolio construction
  2. Position sizing
  3. Risk management

But no philosophy always yields the right approach, so we want to also make sure they understand what market conditions to look out for that would require a shift in philosophy.

3. Process

When it comes to process, we are interested in the individual elements of their process as well as how well those pieces fit together to form a cohesive whole. We are also looking for consistency in how their philosophy informs their process.

While the day-to-day movement of the financial markets is uncertain, a well-defined process can serve as a constant among the chaos. We want to know that a manager is sticking to a process for sourcing and analyzing investments and operating their business. Is there a proven, repeatable process? Can it generate alpha going forward?

4. Portfolios

Objectively understanding the quality and effectiveness of an investment manager or particular portfolio strategy requires an in-depth examination of performance, including a detailed analysis of the sources of returns or attribution analysis compared to the manager’s stated benchmark in terms of allocation, selection and interaction effect. We analyze the portfolios to determine the changes/allocation and fit within the overall investment objective of the manager/fund.

Our objective is to understand the resilience of a manager in generating active returns with respect to the manager’s stated benchmark and the overall market. We also pay attention to “Active Share” to determine how much active management the manager really employs.

5. Performance

In understanding the manager’s performance, we analyze their return, risk and Modern Portfolio Theory (MPT) stats. We also complete a scenario analysis and stress testing to see how the performance holds up under different market environments.

In short, we are looking for managers who can provide two things:

  1. Alpha that is less correlated with other investments in the portfolio, and
  2. Consistency in their ability to generate excess returns.

6. Price

In manager analysis, we evaluate the appropriateness of the expense ratio or price, and if it is commensurate with the historical performance vs. risk, vis-à-vis the competitors. With the increasing proliferation of ETFs, the question of “value-add” on a net of fee basis, and the competition of active management are accelerating. We take into consideration the cost of illiquidity in analyzing the “price” of an investment.

How can you ensure ongoing due diligence of managers?

Every aspect of our due diligence in this area is built around discovering whether the factors of a manager’s past successes are still meaningfully intact. We maintain a watch list of managers, which provides a means for ongoing due diligence and monitoring developments of potential concern.

Before recommending a manager’s Separately Managed Account (SMA) strategy, we may have conference calls or meet with the managers during an on-site visit, if we deem it necessary. This is important because it can often lead to important observations that cannot be ascertained in our analysis. In our experience of doing manager research, we have found that on-site examinations can provide important insights on portfolio decision-making processes and who are the true leaders or decision-makers.

Investment selection is an important part of the client experience, and it is not something you want to leave up to chance or just choosing the same investments your friends use. I hope this provides you with a reliable framework for choosing the right manager for an investment that will be a boon to your clients and your firm.

Doing your due diligence when selecting investment managers can be stressful, time-consuming and exhausting. Carson Partners get the added benefit of our entire Investments team doing research and due diligence on managers for them. If you haven’t at least looked into what being a Carson Partner entails, today is the day to find out. Click here to schedule a complimentary consultation.

00509884 – 08/22/19

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