Do fund selectors really need more analyst hours to do detailed ongoing monitoring or to increase the number of funds on their shortlists? Or is there another solution?
Proper fund manager due diligence is a fundamental part of the selection process. It can take time, a significant effort in resources, and after the manager is hired, ongoing due-diligence at the same level of detail is often overlooked.
Relying on a manager’s good reputation and previous stellar results shouldn’t be enough to build the trust that things will move on smoothly in the future.
For funds registered in the US, FormADV could be a source of data to support the qualitative side of ongoing due diligence and highlight changes. But the question is, as amendments are done by managers a few weeks after they happen and the updated files are shared by the SEC one month after the quarter-end, the data lag means investors are notified months after the material change has happened and drastically reduces the visibility of potential risks.
Fund selectors are slowly moving away from the simple annual review of fund managers to a thorough quarterly and even monthly monitoring questionnaires and reviews, with an increasing focus on the qualitative side of the assessment.
This is generating more work for fund selectors, and relying only on publicly available data sources to perform the quantitative assessment and knowing about changes once it is potentially too late, is just not enough.
How to cope with the challenge?
Monitoring fund managers frequently and thoroughly, just like in the selection process, comes with its constraints.
Time is a finite resource and when selectors allocate time and resources to data and document collection rather than to analysis, the quality of this analysis subsequently suffers.
Adding resources to the team is one way to cope with this. Just as well as outsourcing, but both come with a cost and added risks.
How to optimize the process?
Whilst standard DDQs and database information are ok for generic data, they are of course populated by the fund manager and when fund selectors often have their own processes, proprietary due diligence questionnaires, and firm specific data requests, there is no one-size-fits-all solution.
Digitization of the information exchanged with fund managers, automatically graded responses, a dedicated and customizable channel of communication with fund managers, data centralization, and improved collaboration through task and alerts management can significantly improve the efficiency of this process.
Around 80% of the work done by investors, investment advisors or wealth managers during the selection or monitoring process is related to administrative tasks (collecting data, organizing it, writing research and assessment reports, internal checks and approvals, etc.). Let’s be realistic – administrative tasks are an inevitable part of every due diligence process, and they are a necessary evil.
But what if, using the right technology could reduce the time spent on admin tasks by half? That’s a 40% saving on the total time spent during due diligence and monitoring processes and 40% more time that can be spent on the deeper analysis or on expanding the buy- list. So does this really require another analyst or outsourcing after all?
What can technology do for fund manager monitoring?
Automatic distribution of monitoring questionnaires monthly or quarterly, standardized data collection, reformatting and data optimization, recording activities and communication with managers and centralizing/sorting this data throughout the year requires significant effort and attention.
If all this work and data flow are done through Excel or Word documents, communication performed via email, and information spread across different folders, the monitoring process can cause quite a headache.
In one of our previously published articles – “Due Diligence of External Investment Managers – Digitize or Jeopardize!” we elaborated on the advantages of utilizing technology solutions in the due diligence selection processes. The same ring true when looking at ongoing monitoring, time and resource savings, avoiding mistakes, easier tracking of information and communication flows, systematic and formatted analysis, information security, and costs saving to name a few.
Conclusion
Fund selectors don’t spend enough time monitoring their investments and, in many cases, reviews are still done only on an annual basis and at on-site meetings that could be much more productive with a pre-defined set of issue points to discuss, but ongoing due diligence should be as thorough as during the initial selection process.
Qualitative assessment is an essential part of it. Timely access to granular and good-quality data is crucial.
As a semi-annual, quarterly, or monthly process, the monitoring requires significant effort and resources.
Automating the process brings numerous benefits, which are calculated not only in resource and cost savings but also in reduced mistakes, increased security level, and higher efficiency of the process in general.
Dasseti is a web-based, all-in-one solution that digitizes and automates investment manager due diligence and monitoring processes. To find out more about tools for fund manager monitoring, please contact us.
