Article: Fund Due Diligence beyond those Stars

The recently published and widely read WSJ article* about the limits of Morningstar’s fund ratings tells professional fund investors what they already know – performance numbers alone are inadequate to form a well-founded and accurate view of the future.

In all fairness, it is all too easy, out of historical context, to criticize the extensive use of star ratings over the last 20+ years. The information readily available to most fund investors around the world has been performance-derived.  Stars have served as an easy framework for analysis and comparison in the absence of more robust information.

In the same way, we cannot rightfully criticize explorers of the 1490s for navigating solely by the stars above – our predecessors had limited tools with which to gauge the world around them.  Today we use GPS and digital mapping; modern travelers aren’t guided by stars. With standardization and digitalization of due diligence information, we are escaping the habits and methodologies of the 1990s.  New tools are helping manager due diligence analysts get a more robust and accurate understanding of the investment world around them.  In turn, increased transparency and better decision-making are taking hold.

In the world of fund research and due diligence, qualitative information has long been understood as the more robust complement to performance analysis.  Along with pitchbooks, prospectus and manager websites, DDQs have long been central to information gathering.  But gathering detailed qualitative information and tracking how it changes through time has historically been inefficient.  Door is changing this.

On Door, robust, up-to-date qualitative due diligence information is available for a growing number of funds.  Door replaces the traditional DDQ process of emailed exchanged Word/Excel documents.  Access to the platform provides analysts the opportunity to quickly gain access to fund information and keep track of the key information as it evolves.  The true causes of future performance stability can be identified and monitored.

More robust information leads to the potential for better decision making at every step of executing due diligence on investment managers and their products.  Transparency is paramount.  Gaining an understanding of the people driving the investment process, their philosophy and risk controls along with the broad and complex inputs that drive investment management firms is now easier than ever.

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* “The Morningstar Mirage” –