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Seven qualitative factors for evaluating investments

Posted by Mike Limbacher on February 11, 2015 in Fiduciary Excellence

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Due diligence is the heart and soul of investment selection. A good due diligence process objectively whittles down the universe of available funds to just those that meet your high standards for inclusion in an investment portfolio. Investment due diligence typically begins on the quantitative side by evaluating funds against set benchmarks and in relation to peers.  The fi360 Fiduciary Score®, for example, is calculated using nine quantitative factors that we consider to be the minimum due diligence criteria that you should use when evaluating an investment.  But in addition to quantitative analysis, fiduciaries should consider applying qualitative factors, which can help detect organizational instability. Organizational instability, over time, usually leads to underperformance.

Here are seven qualitative factors that a fiduciary should consider implementing into their due diligence process:

  1. Manager quality – Does the portfolio manager have the necessary experience to manage the type and size of portfolio you are investigating?  In addition to credentials, take a look at prior experience. This is especially important if the manager is new to the firm.
  2. Staff turnover –Along with the portfolio manager, you should also look at the professional staff of the investment company. Has there been significant turnover?  If significant turnover is found, you should dig deeper to find out why.
  3. Organizational structure – You should also investigate any structural changes to the investment company.  It’s important to examine the firm’s mergers or acquisitions to see if the organization is more focused on “castle building” than managing money. If they are building the firm, how will it benefit your client?
  4. Level of service provided - Does the investment company provide a better level of service than other firms in the marketplace for a comparable fee? Does the money manager provide other share classes for a fund or separately managed accounts? Depending on your client’s situation, you may be able to invest with the same portfolio manager, but at a lower cost.
  5. The quality and timeliness of the money manager’s reports – Registered investment companies are required to report information to the SEC, but do they do so in a timely manner? In addition, does the manager provide an adequate amount of information to make an informed decision? If they do not, what is the cause of delay or omission?
  6. Response to requests for information – Like every other service company, the investment company has customers, primarily advisors and investors.  Do they treat their customers with care? If you request information from the investment company, do they provide it in a timely manner with a relevant response?
  7. Investment education - Does the portfolio manager provide an adequate explanation of the investment decisions made and the factors considered in making decisions?  Is the portfolio manager able to easily articulate the portfolio mandate, the plan to follow the mandate, and any problems seen in achieving the mandate? 

This is by no means a comprehensive list. Instead, it’s a demonstration of the type of probing analysis an advisor can use in their selection and monitoring process.

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Investment due diligence is one of the core functions of an investment fiduciary. fi360's various professional development courses provide instruction on both the quantitative and qualitative side of evaluating investments. Implementing set, objective criteria to your investment selection and monitoring can help you demonstrate to clients how you make decisions in their best interests.   

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