Why is a qualitative asset manager due diligence as important as a quantitative one? Find out in the article…
Although an increasing number of investors and consultants recon that qualitative screening and monitoring is equally, if not more important, than the quantitative side of the due diligence, the practice shows that decision process is still more about performance and fees chasing.
Asset owners’ teams are often strained in terms of resources and time. This, combined with the big number of managers’ strategies, the complexity of some products and some asset classes, and the lack of technology support might have an impact on the depth of due diligence analysis and especially on its qualitative side. Indeed, the qualitative assessment in many cases has become more a documentation process, than investigative discovery process.
Qualitative assessment is done on the basis of data collected mainly through the following channels:
- Due Diligence Questionnaires.
- Information gathered during the different interactions with managers (such as onsite meetings, or calls).
- Other sources: network, publicly available information, etc..
Being able to track and retrieve managers related meetings/calls notes, articles, research notes or responses to specific questionnaires easily can be of the great help in monitoring changes over time at the manager’s side. It is important for long-term institutional investors and consultants to assess the consistency and repeatability, but it is even more important to see the continuous improvement.
Qualitative assessment goes beyond collecting the narratives. The constant investigation, discovery, and rating based on the qualitative assessment criteria are fundamental to get a full picture of the manager’s characteristics. The narratives about Investment managers used by Asset owners in their decision making are often a copy paste of the managers’ ones, while they should be theirs.
The three main components of an organization qualitative evaluation are Philosophy, Process, and People (the three Ps). This article explains why assessing those three Ps needs to have a larger role in the asset manager due diligence.
- Philosophy – One of the aims of qualitative assessment is to find out if the organization’s philosophy presented in the firm’s external communication is only a marketing narrative, or employees in the organization (especially management) live this philosophy. Standardized documentation, focused on quantitative information cannot reveal the true situation, but targeted questions and meeting people onsite surely can.
- Processes – how the organization works – The perfect organization doesn’t exist. Even if the outer picture seems to reveal the ideal environment, every organization is messy to some degree. It is crucial to set apart from the presentations with the organizational scheme and processes descriptions and explore the real picture. Qualitative assessment helps to find out how the organization works in everyday operations – how decisions are made in reality, how processes work from the initial phase to the outcome, and how relations between different organization levels function.
- People – who “powers” the organization – Investment managers and analysts are people who make decisions just like all people do. This part of qualitative assessment deals with judging the human skills. It gives the answers if the organization employs the right people, who implement its philosophy and processes.
In the long run, organizational structure, people and philosophy, are likely to drive future performance, and not the evidence of the past performance
With markets volatility, low returns and increasing scrutiny, the qualitative assessment of managers inevitably becomes more important and needs to be conducted more thoroughly.
Understanding the manager investment philosophy, risk management techniques or doing proper operational due diligence (ODD) requires many interactions with the manager, many discussions, and asking many questions. All this must be tracked, analyzed and rated. Asset owners have to embrace more technology in order to optimize and digitalize their processes. They need to make their due diligence more efficient in the sense of the quality of the selection process itself, as well as the quality outcome, namely – finding the best manager for their investment strategy.