All of the investing institution’s internal investment managers and external investment managers (“managers”) are monitored from a forward-looking perspective, with the key aim of determining whether they are likely to generate future outperformance net of fees.
The process of monitoring a manager is very similar to that of selecting a manager; therefore, factors considered as part of the selection of the manager should be incorporated into the monitoring process, i.e. consideration of manager portfolios, strategy and risk, and qualitative factors, such as business factors, people and the investment process adopted.
Manager compliance and style monitoring complement performance and risk analysis monitoring and should be an integrated part of the monitoring process of internal and external fund managers.
- Information pertinent to the appointment of a specific manager should be documented as part of the selection process, which can then be interpreted into a series of review triggers. These triggers should be reviewed as part of the investing institution’s regular qualitative and quantitative review of managers to ensure that the rationale behind the appointment and, therefore, in the achievement of performance objectives, remains valid.
- The agreement between the investing institution and the external fund manager should include clear and observable investment guidelines and benchmarks.
- It should be clearly understood which changes within a manager may result in a weakening of the investing institution’s confidence in the manager’s ability to meet performance objectives net of fees.
- An internal agreement may be used to state clear and observable investment guidelines and benchmarks for internal investment managers.
- Breaches of investment guidelines by internal or external managers should be monitored by the management or investment committee, or outsourced to an appropriate third party (e.g. a custodian).
- There should be a documented process for the treatment of different types of breaches of an internal or external manager’s investment guidelines, e.g. active breaches, passive breaches, downgrade breaches or regulatory breaches.
- As part of the regular monitoring process, the investment style of a manager should be considered to ensure it is consistent with the original mandate awarded (e.g. consistent with the manager’s expected competitive advantage) and, therefore, the manager’s ability to achieve its mandated objectives. Any evidence of style drift should be discussed with the manager and the investing institution’s allocation to the manager reassessed if the change in investment style appears to be a significant and/or permanent change.
- The quantitative and qualitative monitoring of managers should be clearly documented. This may be delegated to an appropriate third party; however, it should be subject to review by the investing institution.
- All managers should be regularly monitored against documented review triggers, with the aim of determining whether the manager can meet the performance objectives.
- The investing institution’s confidence in a manager should be reconsidered whenever a significant change occurs, e.g. a change in investment process or departure of a key person, or because of wider business issues.
- Breaches of investment guidelines by a manager should be monitored and acted upon promptly.
- The investment style of managers should form part of the monitoring process.
- The monitoring of managers should be clearly documented.