The interruptions to work and the revolution of technological tools in 2020 have changed thee way investors assess funds managers. A discussion around due diligence in a lockdown environment finds that allocators have tended to stick with existing relationships through the pandemic making it difficult for managers approaching investors for the first time to form relationships and win mandates.
Technology will play an increasingly important role in manager due diligence, said Rick di Mascio, chief executive, Inalytics, speaking at FIS Digital 2021.
Lockdown has made building manager relationships and trust more challenging; pension funds struggling to carry out due diligence on managers without the ability to look them in the eye can use technology to provide a valuable new lens. Inalytics uses technology to verify what managers say, providing the ability to get behind what pension fund teams are being told. Data plays a role by allowing investors to see from an evidence base where a mangers key strengths and weaknesses lie, he said.
Quant analysis can add value to investment decisions and enables better monitoring of managers, agreed fellow panellist Dev Jadeja, head of investment due diligence at the Local Pensions Partnership Investments where he is responsible for researching and picking managers.
However, he said it was important to step back and ensure the right filters are applied and that human judgement calls have an equal weight in the investment process. A qualitative overlay is important because quant analysis only gets so far, he said. Moreover, he said that most data is available in public markets making the use of quant analysis in private markets trickier.
Luba Nikulina, global head of research at Willis Towers Watson argued that new working practices wrought by the pandemic have bought positives and negatives to manager selection. On one hand, asset managers availability has increased because travel has ended, increasing productivity.
It is easier to set up meetings, she said. Adding that although meeting remotely makes it difficult to assess culture and other soft factors that shape investment decisions, screen-based meetings can also provide valuable insight into a manager’s home life.
Nor does she believe the flow of ideas has slowed. She added that WTW puts qualitative due diligence ahead of quantitative analysis but said investors that failed to take advantage of the availability of data would be making a mistake. She noted however that due diligence on hard assets has been much more challenging over the last year.
Two sides of the same coin
Di Mascio said drawing on data helps addresses personal bias and urged delegates to view quantitative and qualitative analysis as two sides of the same coin, acting in support of each other. Data creates the environment to ask the right questions.
For example, the insight it provides on emerging market managers’ performance ensures investors start with a strong cohort from which to base their selections, speeding up the process and avoiding any hoodwinking on track records.
Data has the impression of being hard edged and in conflict with qualitative analysis, but he said it is particularly valuable in a selection process where there is no relationship or monitoring. You can get behind the numbers and ask real questions, he said.
Looking to the future, Jadeja predicted that travel in person will halve. Positively, he reflected how remote meetings have removed many of the challenges of face-to-face meeting; constant travel to onsite meetings comes with pressure and logistical issues around getting everyone in the room.
In contrast, remote meetings allow investors to target who they speak to. That said, he acknowledged the challenges of getting to know someone personally remotely. You are not just investing in a product he said, you need to know the other side and they need to know you, and this is difficult via video.
The conversation turned to how the pandemic has stalled hiring of new managers.
Jason Morrow, deputy, chief investment officer at Utah Retirement Systems in the US said the fund has allocated mainly to incumbents over the last year.
It is easy to allocate to long relationships in a downturn, he said going on to reference how the Fed backstop repriced assets triggering a surprisingly quick reversion. Allocating remotely bought challenges around getting comfortable, but the fund was doing everything it could from a due diligence perspective.
“We can get face time with everyone we need to and focus on site where we need to,” he said.
Indeed, panellists agreed that small, start-up managers have struggled to get over the line during the pandemic. Many investors have stuck with existing managers because it has been more difficult to get comfortable with new teams.
For example, Jadeja said LPP would not have invested with a new manager if it felt key-man dependent and had never met them.
Where the fund has deployed to a new manager, that decision was based on having monitored them for a long time.