Although an increasing number of investors and consultants believe that qualitative screening and monitoring is equally, if not more important, than the quantitative side of due diligence, practice shows that the decision process is still more about performance and fee attainment.
Asset owners’ teams are often stretched for both resources and time. This, combined with the number of managers’ strategies, the complexity of some products and asset classes, and the lack of technology support, can impact the depth of due diligence analysis. Qualitative analysis particularly, is very labour intensive and can easily become more of a documentation process, than investigative discovery.
Qualitative assessment is usually performed through data collected through the following channels:
Being able to track and retrieve managers' related meetings/calls notes, articles, research notes or responses to specific questionnaires easily can be valuable, when monitoring changes within managers over time. It is important for long-term institutional investors and consultants to assess the consistency and stability of a manager, but it is even more important to see continuous improvement.
The constant investigation, discovery, and rating based on qualitative assessment criteria are fundamental if asset owners are to get a full picture of managers' characteristics. The narratives about investment managers used by asset owners in their decision-making are often a copy paste of the information provided by the manager. Asset owners should be undertaking their own.
The three main components of a qualitative evaluation are Philosophy, Process, and People (the three Ps). This article explains why assessing those three Ps should play a larger role in asset manager due diligence.
One of the aims of qualitative assessment is to find out if the organization’s philosophy, presented in the firm’s external communication is merely a marketing story, or whether it is truly lived by employees. Standardized documentation, focused on quantitative information cannot reveal the true situation, but targeted questions and meeting people on-site can.
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.
Investment managers and analysts make decisions like everyone else. This part of qualitative assessment deals with judging the human skills. Does the organization employ the right people, who can implement its philosophy and processes.
In the long run, organizational processes, people and philosophy, are likely to drive future performance, and are a more reliable marker than past performance
With market volatility, low returns and increased regulatory scrutiny, qualitative assessment of managers becomes more important.
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 digitize 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.
If you would like to know more about the tools that support qualitative assessment management, please contact us.