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Defining the Universe: What is the set of managers that best fits the portfolio's needs?
Investment Due diligence
Operational and Due Diligence
The initial search for a manager will likely yield far too many options, more than could be given proper consideration. This search will need to be filtered given a set of criteria deemed important to the researchers. If the list of managers is still too broad or too narrow, the search criteria can be adjusted to yield an appropriate amount of search results.
An important consideration will be the IPS. If the IPS does not allow for active management, this must be reflected in the initial search criteria. A search for passive managers will be the initial filter, and more criteria will be added subsequently. A search will often begin with a benchmark that represents the manager's role within the portfolio. The benchmark also provides a reference for performance attribution and appraisal. There are several approaches to assigning a manager to a benchmark:
Not surprisingly, a hybrid strategy that combines elements of each approach is often used and recommended. It is important to note that initially, the screening should avoid using performance. The focus at this point is on understanding the manager's risk profile and identifying appropriate candidates. Lastly, the final step in the selection process cannot be understated. Selecting a manager is important, but it is a dynamic problem and needs to be properly monitored over time as circumstances inevitably change.
Question
Performance monitoring is a part of which phase of investment manager selection and due diligence?
- Manager universe.
- Qualitative analysis.
- Quantitative analysis.
Solution
The correct answer is C.
Performance monitoring is a crucial part of the quantitative analysis phase. Quantitative analysis focuses on analyzing the historical performance of the investment manager's strategies, comparing it to relevant benchmarks, and assessing risk metrics. It involves looking at performance data and financial metrics to determine how the manager has performed in the past.
A is incorrect. It refers to the initial step where a broad pool of potential investment managers is identified and screened. This phase involves compiling a list of potential managers, and performance monitoring does not take place at this stage. Performance monitoring is typically conducted after the manager has been selected and investment activities are underway.
B is incorrect. Qualitative analysis involves evaluating non-numeric factors like the manager's investment philosophy, team, process, and compliance with regulations. While performance can be part of the qualitative analysis discussion, it is not the primary focus of this phase. Performance monitoring usually occurs after the qualitative analysis is completed.
Reading 13: Investment Manager Selection
Los 13 (a) Describe the components of a manager selection process, including due diligence