My 16-year old son is taking exams at the moment. He came home one night last week, flushed with success. “I finished the paper 20 minutes early and when I looked around everyone else was still scribbling frantically, didn’t I do well”. Perhaps, I said, but what did you miss? Did the others know something that you didn’t?
Manager research teams have the same concerns when monitoring their managers. They’ve carefully crafted a due diligence questionnaire and compliance is happy with it, but what if they’ve missed something? Successful fund selection is difficult enough, requiring a judgement to be made as to a manager’s prospective performance outcome without close proximity to the people and process behind it. It is vital that fund selectors give themselves every edge possible and not miss something that others are analyzing.
Fund selection is about weighing up what you see and hear, but it’s just as important to assess factors that might not be so obvious, or those that might be obscured from view. That’s where an efficient Due Diligence Questionnaire process comes in. The DDQ ensures you ask all the right questions, ask them in a timely manner, monitor and assess changes over time, and then circle back to the manager to reconfirm your initial investment thesis. Most fund investors have their own proprietary DDQs and they’re fairly sure that they include all the right questions. They suspect they ask similar questions to their peers. But how do they know? How can they be sure that they’re not overlooking something important? How do they know if they’re asking the right questions about ESG? Or Diversity & Inclusion? Cyber security is making headline news. We believe the answer lies in the peer review process.
Door’s Standard Questionnaire was first created in collaboration with 10 large manager research teams across Europe and 12 cross-border asset managers; the Guidance Panel. Further Guidance Panels in the US, for 40 Act funds, and European ETFs have lent additional thoughts and opinion. It is an amalgamation of their accumulated wisdom and represents best practice in due diligence. And it doesn’t stand still. It is a living and breathing document that is constantly peer-reviewed by the 140 manager research teams that have already registered on Door and use the service. It is more robust than any individual DDQ as a result. Sending the same Word document that was used last year carries risk that the fund investor needn’t take. And, just in case we have missed something, or if a fund investor has a killer question that they think provides them with an edge and others haven’t considered (or they require some information specific to their investment), they can add it to the Questionnaire as a supplemental question.
The other, perhaps less obvious benefit of peer-review, is that it ensures that fund investors better meet their responsibilities as fiduciaries. Far from outsourcing these responsibilities, the fund investor’s process is strengthened. Door doesn’t own the information that is requested, the fund investor does. He or she just uses the standard questionnaire as their own; they are merely requesting the information through Door instead of sending a Word document. The DDQ can be printed and kept on file if required by the fund investor’s requirements as a fiduciary, as it would always have been, as well as being maintained digitally on the platform. Fiduciary responsibility is not undermined. It is in fact enhanced, as alerts to changes in the information are built into the Door platform and communicated to fund investors as they happen.
A well-designed due diligence process is a key element in the art of fund selection. Don’t miss something important. Do you want an A-grade or a D minus?