Sufficient selection due diligence is conducted when selecting external fund managers.
Guideline code
INVEST_03600
Mechanism
Mechanism
- There should be a procedures manual approved by the board or management that describes the necessary selection due diligence process for external fund managers.
- The procedures manual should cover the following key stages of the selection due diligence process:
- Define/determine the universe of external fund managers for a specific mandate. This may be based on market knowledge, contacts, publications or databases;
- Determine a long list of external fund managers for initial desk-based research. Initial desk-based research on the universe of managers may include, but is not limited to: experience and stability of the investment team; fees; process and philosophy of the manager; and quantitative analysis. Further points to consider in this or the following step are listed below;
- Conduct further research and initial meetings with external fund managers whose attributes qualify them for further investigation. This process should confirm or deny the initial desk-based research and further narrow the list of potential external managers to form a short list for further research;
- Conduct more detailed analysis of the short list of external fund managers to ensure they are appropriate given the risk and return attributes of the proposed mandate;
- When a decision to potentially appoint an external fund manager has been made, any further outstanding due diligence of fees (including negotiation), consideration of appropriate investment vehicles and operational matters should be completed.
- Throughout the selection due diligence process, the management or investment committee should consider three key areas: business, people and process:
- Business. To be successful in the future, external fund managers need to have a well-run business which should ideally exhibit the following characteristics:
- Long-term focus on asset management by strong business leaders;
- Stable corporate structure;
- Significant investment in key aspects of business;
- Successful management of the growth of the business as well as the existing client base;
- Business structure and employee interests are aligned with those of clients (this topic is addressed in more detail in Guideline 31, Alignment of incentives of external fund managers and objectives of the social security institution);
- Non-bureaucratic, investment-led culture.
- People. External fund managers need to ensure they employ talented investors who are well organized. Ideally, they should exhibit the following characteristics:
- Talented, experienced and motivated investors;
- Focused decision-making with clear accountability;
- Adequate depth of resources relative to the process employed;
- A culture that promotes creative thinking and collaboration;
- Effective, cohesive teams with complementary skills and personalities;
- Healthy staff turnover, neither too high nor too low.
- Process. In addition to having a stable business with a talented team of investment professionals, the following process characteristics should be sought:
- A clear investment philosophy and process that is designed to leverage competitive advantages;
- Superior research that produces unique investment insights;
- Portfolio management that translates research into portfolio positions;
- Proactive consideration of potential process improvements;
- Appreciation and management of all risks relevant to the investment approach;
- Effective management of wider impacts upon performance, such as capacity issues and transaction costs.
- The management or investment committee is responsible for ensuring sufficient selection due diligence has been undertaken, with appropriate review by the board.
- Where the board, management or investment committee lacks sufficient resource, expertise or governance budget to make fully informed decisions about external manager selection, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions.
Structure
Structure
- The board should establish the policy that sets the selection due diligence process for the selection of external fund managers.
- The selection due diligence process should cover three key areas: business, people and process.
Title HTML
Guideline 30. Selection due diligence for external fund managers
Type
Guideline_1
Weight
40