Labor disruptions and the technological tool revolution in 2020 have changed the way investors evaluate fund managers. A discussion of due diligence in a foreclosure environment reveals that beneficiaries have tended to stick to existing relationships during the pandemic, making it difficult for managers approaching first-time investors to build relationships and win mandates.
Technology will play an increasingly important role in manager due diligence, said Rick di Mascio, chief executive of Analytics, speaking at FIS Digital 2021.
The lockdown made it more difficult to build relationships and trust between managers; Pension funds that struggle to perform manager due diligence without being able to look them in the eye can use technology to provide a valuable new goal. Inalytics uses technology to verify what managers are saying, providing the ability to support what pension fund teams are saying. Data plays a role in allowing investors to see from an evidence base where a manager’s main strengths and weaknesses lie, he said.
Quantitative analysis can add value to investment decisions and allows for better monitoring of managers, agreed Dev Jadeja, panel member, head of investment due diligence at Local Pensions Partnership Investments, where he is responsible for the research and selection of managers.
However, he said it was important to take a step back and ensure that the right filters are applied and that appeals to human judgment are given equal weight in the investment process. Qualitative overlay is important because quantitative analysis doesn’t go far, he said. In addition, he said that most of the data is available on public markets, which makes the use of quantitative analysis in private markets more delicate.
Luba Nikulina, global head of research at Willis Towers Watson, argued that the new working practices brought about by the pandemic have brought advantages and disadvantages to the selection of managers. On the one hand, the availability of asset managers has increased due to the end of travel, increasing productivity.
It’s easier to organize meetings, she said. Additionally, although remote meetings make it difficult to assess culture and other soft factors that shape investment decisions, on-screen meetings can also provide valuable insight into a manager’s family life. .
She also doesn’t believe the flow of ideas has slowed down. She added that WTW puts qualitative due diligence ahead of quantitative analysis, but said investors who do not take advantage of the availability of data will be making a mistake. She noted, however, that due diligence on durable goods has been much more difficult over the past year.
Two sides of the same coin
Di Mascio said mining data helps fight personal biases and urged delegates to see quantitative and qualitative analysis as two sides of the same coin, acting in support of one another. . Data creates the environment to ask the right questions.
For example, the insight it provides into the performance of emerging market managers ensures that investors start with a strong cohort from which to base their selections, speeding up the process and avoiding any cheating on the track record.
The data feels like it’s cutting edge and conflicts with qualitative analysis, but he said it’s especially valuable in a selection process where there is no relationship or follow-up. You can hide behind the numbers and ask real questions, he said.
Looking ahead, Jadeja predicted that in-person travel would be cut in half. In a positive way, he explained how remote meetings have removed many of the challenges of face-to-face meetings; constant travel to onsite meetings creates pressure and logistical issues to get everyone into the room.
In contrast, remote meetings allow investors to target who they are speaking to. That said, he recognized the challenges of getting to know someone personally from a distance. You don’t just invest in a product, he said, you have to know the other side and they have to know you, and that is difficult via video.
The conversation turned to how the pandemic blocked the hiring of new managers.
Jason Morrow, deputy, director of investments at Utah Retirement Systems in the United States, said the fund had primarily allocated to incumbents over the past year.
It’s easy to attribute it to long relationships during a downturn, he said, referring to how the Fed’s backstop revalued assets, triggering a surprisingly rapid reversion. Assigning challenges purchased remotely to get comfortable, but the fund was doing all it could from a due diligence perspective.
“We can spend time with everyone we need and focus on the site where we need it,” he said.
Indeed, panelists agreed that small start-up managers have struggled to cross the line during the pandemic. Many investors have remained loyal to the existing managers as it has been more difficult to feel comfortable with the new teams.
For example, Jadeja said that LPP would not have invested with a new manager if he felt dependent on a key man and had never met him.
When the fund was rolled out to a new manager, this decision was based on his extended follow-up.