Understanding Investment Manager Research: Strategies And Insights

Investment manager research is a complex and detailed process that involves evaluating and selecting investment managers to help investors achieve their financial objectives. It is a critical aspect of the investment industry as it helps investors identify the best investment opportunities and make informed decisions. The research process includes analysing investment strategies, performance track records, and qualitative factors such as a manager's structure, philosophy, and investment process. Due diligence is a key component, encompassing an evaluation of the firm's integrity, operations, and personnel. The goal of investment manager research is to provide investors with unbiased insights and guidance, helping them navigate uncertain markets and make decisions that align with their risk profiles and investment goals.

Investment manager due diligence

Investment manager research is a complex and detailed process that involves evaluating and selecting investment managers who can help investors achieve their financial objectives. This process is known as investment manager due diligence, a vital aspect of portfolio monitoring. Due diligence in this context involves understanding how investment results were achieved and assessing the likelihood of the manager continuing to follow the same process.

Operational due diligence (ODD) is a key component, addressing operational risk and supporting investors through manager selection. ODD is especially important in today's complex investment landscape, where investors' portfolios are increasingly diverse and complex. The Operational Risk Solutions (ORS) group is one such example of a service that supports investors with a range of operational risk needs.

The due diligence process also involves rigorous risk assessment and compliance checks to protect against regulatory risks and safeguard client assets. This comprehensive process allows advisors to make informed decisions and provide their clients with potentially higher-quality investment choices.

Outsourcing investment manager due diligence to third-party specialists is an option that has gained traction. This approach offers expanded investment options, access to specialised expertise, and a more efficient use of time and resources.

Qualitative and quantitative analysis

Qualitative Analysis

Qualitative analysis involves evaluating subjective, non-numerical data such as a company's management expertise, industry cycles, research and development strength, and labour relations. It deals with intangible and inexact information that can be challenging to collect and measure. This type of analysis is often associated with understanding people and company cultures, and it may involve interviews, observations, and textual analysis of documents and news reports. Qualitative analysis helps investors understand the company's value and prospects beyond just financial metrics.

Quantitative Analysis

Quantitative analysis, on the other hand, is a mathematical and statistical approach to determining the value of a financial asset. Quantitative analysts, or "quants," use historical data, mathematical models, and computer programs to identify patterns and make predictions about investment opportunities. They focus on the numbers and choose investments that offer the best returns for the lowest level of risk. This approach is unemotional and cost-effective, but it is vulnerable to manipulated data and sudden changes in market trends.

Application in Investment Manager Research

In the context of investment manager research, qualitative analysis involves evaluating the investment manager's process, personnel, portfolio construction, and infrastructure. It helps investors understand how investment results were achieved and assess the likelihood of the manager continuing to generate satisfactory returns. Quantitative analysis, on the other hand, involves a detailed analysis of the manager's performance track record, including risk exposures relative to benchmarks and various financial ratios. Together, these approaches enable investors to make informed decisions about selecting and retaining investment managers.

Investment manager selection

The selection of appropriate investment managers is a complex and detailed process that can have important financial consequences. It involves a broad set of qualitative and quantitative considerations to determine whether a manager displays skill and the likelihood that the manager will continue to display skill in the future.

The qualitative analysis consists of investment due diligence, which evaluates the manager's investment process, investment personnel, and portfolio construction; and operational due diligence, which evaluates the manager's infrastructure, including the integrity of the firm, its operations, and personnel.

The quantitative analysis involves evaluating the costs and benefits of pooled investment vehicles and separate accounts, comparing types of investment manager contracts, and analyzing performance-based fee schedules. It also includes the use of returns-based and holdings-based style analysis in investment manager selection, as well as the evaluation of capture ratios, drawdowns, and other performance metrics.

Additionally, investors are increasingly incorporating environmental, social, and governance (ESG) or diversity issues into their manager selection processes. This adds another layer of complexity to the decision-making process.

Overall, the investment manager selection process is a challenging and multifaceted task that requires a thorough understanding of the qualitative and quantitative factors involved. It is crucial for investors to conduct thorough due diligence to make informed decisions and avoid common pitfalls.

Investment manager research process

Investment manager research is a complex and detailed process that involves evaluating and selecting investment managers based on various criteria to help investors achieve their financial objectives. The process goes beyond analysing investment returns and requires a combination of quantitative and qualitative analyses. Here is a step-by-step overview of the investment manager research process:

Step 1: Understanding Investment Results and Processes

The first step is to evaluate the investment results and understand how they were achieved. This involves analysing the investment strategies, processes, and decisions that led to the returns. By doing so, researchers can assess the likelihood of the investment manager continuing to generate superior or satisfactory returns in the future. This step also includes evaluating the consistency and appropriateness of the investment process over time and across different market environments.

Step 2: Due Diligence

Due diligence is a critical aspect of the investment manager research process. It involves a comprehensive investigation and analysis of the investment manager's operations, integrity, and personnel. Due diligence can be further divided into two types:

• Investment Due Diligence: This focuses on the investment process, investment personnel, and portfolio construction. It evaluates the expertise and experience of the investment team and assesses whether the investment process is consistent with the stated investment philosophy.
• Operational Due Diligence: This type of due diligence evaluates the manager's infrastructure, including the firm's integrity, operations, and personnel more broadly. It ensures that the investment manager has a solid foundation and capable team to support their investment strategies.

Step 3: Quantitative Analysis

The research process includes a quantitative analysis of the investment manager's performance track record. This involves assessing various metrics and ratios, such as capture ratios, maximum drawdown, and drawdown duration. By analysing these quantitative factors, researchers can evaluate the manager's risk-adjusted returns, upside and downside capture, and the magnitude of losses incurred during negative market periods.

Step 4: Qualitative Analysis

In addition to quantitative analysis, a qualitative evaluation of the investment manager's investment process is conducted. This includes understanding the investment philosophy, investment decision-making process, and the factors that drive their investment strategies. The qualitative analysis also considers the manager's infrastructure, integrity, and personnel, as mentioned earlier in the due diligence step.

Step 5: Manager Selection

Finally, the research process culminates in the selection of the investment manager(s) that best align with the investor's objectives and criteria. This step involves comparing and evaluating multiple candidates based on the findings from the previous steps. The selection process should be structured and well-defined, allowing for a comprehensive evaluation of each manager's strengths and weaknesses.

It is important to note that the investment manager research process can vary among organisations, and the above steps provide a general framework. Each step may involve multiple sub-processes and considerations, depending on the specific needs and requirements of the investor.

Investment manager evaluation

Investment manager research is a complex and detailed process that involves evaluating a manager's track record, investment process, and infrastructure to determine their skill and likelihood of continued success. Here are some key considerations for investment manager evaluation:

Quantitative Analysis

This involves assessing a manager's performance track record using various measures such as risk, risk-adjusted returns, and consistency. The evaluation of risk includes considering factors such as down capture ratio, downside risk, largest drawdown, volatility, and beta. Risk-adjusted returns can be measured using the Sharpe ratio and information ratio. Consistency is also important, as it indicates the manager's ability to generate stable returns over time.

Qualitative Analysis

The qualitative evaluation focuses on the investment manager's team, structure, philosophy, and process. It is crucial to assess the key investment professionals and portfolio managers within the firm. The manager's structure, philosophy, and investment process should align with the client's goals and risk tolerance. The investment process should be clear, consistent, and appropriate for the manager's philosophy.

Investment Due Diligence

This involves evaluating the manager's investment process, investment personnel, and portfolio construction. It is important to understand how the manager generates investment ideas, constructs their portfolio, and translates investment ideas into specific weightings within the portfolio. Additionally, the due diligence process should consider the transaction costs and opportunity costs associated with the manager's strategy.

Operational Due Diligence

Operational due diligence entails evaluating the manager's infrastructure, including the integrity of the firm, its operations, and personnel. This includes assessing the firm's research, information technology, operations, compliance, trading capabilities, and client service. By conducting operational due diligence, investors can gain confidence in the manager's ability to execute their strategy effectively and efficiently.

Manager Scoring and Watchlists

Investment managers are typically scored based on a combination of quantitative and qualitative factors. A manager's poor performance may trigger additional scrutiny and oversight, and they may be placed on a "watch list". The decision to terminate a manager is based on unique circumstances, such as material changes in organization, deviation from stated investment style, or significant underperformance relative to benchmarks or peers.

Final Approval and Monitoring

After thorough evaluation and due diligence, the final stage of manager selection involves obtaining approval from key decision-makers. If approved, the manager is closely monitored on an ongoing basis to ensure their continued alignment with the client's goals and the overall investment strategy.

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