• Confirm the credentials of the firm’s licensed professionals—
their sign-offs are at the core of the firm’s fiduciary responsibilities.
Spend time with the firm’s managers and researchers to assess
not only what they know, but how they think, Northern Trust’s Vella
said. “Talk with the specialists. If health care is growing, talk with the
health care analysts to see what the manager is working from.” When
talking with fixed-income managers, “ask about strategies designed
for particular types of funds, like liability-driven investments.”
The more complicated the investment methodology, the
more complicated the manager’s business model, and this imposes
a corresponding responsibility to unpack that methodology.
Convergence Inc. has created analytics that profile the complexity
Give Diligence Its Due
of alternative investment managers—in essence, providing a window
into the “black box” of risky, complicated assets that require expert,
hands-on management. Extracting metrics that enable apples-
to-apples comparisons of alternative returns equips managers
with the details needed to decide if the complexity and risk are
worth the effort, says John Phinney, president of the Norwalk,
Connecticut-based firm. But complex business models are high-main-
tenance and require specialized oversight and monitoring, further
ON THE JOB
Consolidate, confirm, and
Establish an investment
committee of qualified members.
Create an investment policy
statement by reviewing and
summarizing compliance and
fiduciary parameters and goals
for each investment “bucket” and
Assess internal resources and
ongoing capacity for overseeing
outsourcers and consultants,
including functions such as
Decide which functions to keep
in-house and which to outsource.
Identify the required characteristics
of your fund managers and the results
you expect for each “bucket”
to be outsourced.
Research, qualify, and
Screen potential fund managers for
both performance and process.
Depending on how many you are
considering hiring, decide whether
to assemble a team of best-in-class
managers or to work with a large
firm that encompasses a spectrum
of asset classes and investment
See how the functions and scope
of work you need to outsource
mirrors the provider’s established
book of business.
Analyze recent performance but
also the outsourcer’s capacity for
Ask for sample client reports and
review them with counsel.
Monitor economic conditions,
performance and peer groups for
each “bucket” and asset class.
Monitor fees to detect
opportunities for lowering costs.
Review compliance changes
and adapt investment policies
Regularly review reports and
With a transparent process
emerging risks with the investment
committee and your outsourcers
and adapt strategies and policies
that lets the public view its
investment process, New
Mexico’s investment officials
are essentially crowd-sourcing
their credibility. “It removes a
layer of ‘trust us,’” says Smith.