Set out the stages of the manager selection process, with due diligence among them
The idea
Selection starts by defining the universe of managers that fit the asset allocation and the mandate. Quantitative screening follows, using performance appraisal, attribution, style analysis, capture ratios and drawdowns to reach a short list that appears to add value consistently. Qualitative due diligence then has two strands: investment due diligence, covering philosophy, process, people and portfolio characteristics; and operational due diligence, covering trading, custody, valuation, compliance, technology, audits, business continuity and the firm's ownership and stability. The vehicle and its terms, including fees, liquidity and reporting, are assessed too. After hiring, ongoing monitoring applies the same tests. Operational failings can end a mandate however attractive the returns, so a strong track record never substitutes for operational review.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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- Distinguish Type I from Type II errors when deciding whether to hire or keep a manager
- Explain how style analysis, both holdings-based and returns-based, supports the choice of investment managers
- Explain how maximum drawdown, drawdown duration, capture ratios on the upside and downside, and up/down capture help in assessing managers
- Assess the investment philosophy of a manager and the process by which it reaches investment decisions
- Discuss how behavioural factors shape the decisions of an investment team and propose ways to limit their influence
- Weigh the benefits and costs of separate accounts against those of pooled investment vehicles
- Contrast the main forms of investment manager contract, covering their key provisions and their advantages and drawbacks
- Set out the three standard ways a performance-based fee can be structured
- Analyse an illustrative performance-based fee schedule and interpret its outcomes