Now that we have created a screened list of investment managers through networking and using the third party databases and our own internal data- bases, it is time modify the list based on the other sources of information we have discussed. At this stage it is usually best to distribute the search guidelines and the initial screen’s results to the members of your investment committee and set a date and time for review and discussion. While this meeting is technically not necessary, I have found that a group of invest- ment manager analysts can offer unique insights and apply their personal knowledge base to the search in a way that a single analyst cannot.
Using the initial screened list of small-cap value managers in Exhibit 2.4 as a starting point, a number of changes can be made. A sample of a modified list is shown in Exhibit 2.8. This report is the same one used pre- viously, but has been modified to include the insights of the investment committee members. For example, Cross Capital Management has been crossed out because the investment committee knew from experience that this firm has recently experienced significant personnel turnover. Kiuley Capital Advisors has been added, despite having a short product history.
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EXHIBIT 2.8Revised Search List Firm/Product Data*Returns-Based Data* (Annualized) 3-Year5-Year InceptionFirmProductManager3-Year5-YearStandard Standard ManagerDateAssetsAssetsTenure†PerformancePerformanceDeviationDeviation CAM Asset Management1/1/98$410M$350M5.57.98.624.223.1 Zenith Capital1/1/93$13.6B$1.3B6.56.44.422.223.1 Revco Partners1/1/00$150M$150M3.57.2n/a24.7n/a Alders Asset Management3/1/97$1.2B$800M6.46.65.025.826.1 Eagle Capital Management2/1/00$210M$90M3.48.2n/a25.1n/a Cross Capital Management4/1/97$1B$400M6.37.97.525.123.6 Kiuley Capital Advisors12/03$100M$100M0.5n/an/an/an/a S&P 600 SmallCap Index2.43.721.522.2 S&P 600 SmallCap Value Index8.03.823.321.2 *All data through June 2003. †Manager tenure stated in years and represents period managing current product.
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The investment committee learned from reading industry news that the portfolio management team from Beasley Investments that left that firm last year had done so to start up Kiuley Capital Advisors. The investment committee decided to include this firm pending further analysis.
Kiuley is highlighted in italics because its very short history will need to be evaluated before we can realistically consider the firm for this search.
Cross Capital was eliminated due to employee turnover. While one of the original portfolio managers is still at the firm and managing the small-cap value product, his two key partners decided to leave the firm just a few months prior to running the screen. It is an example of how screened data can be misleading. Cross was able to keep its manager tenure at 6.3 years because one of the three founding partners still works on the product. As you can see from the returns-based data, Cross appears to be an attractive candidate, but knowing that two-thirds of the team that was responsible for achieving those excellent results is no longer with the firm, we can ef- fectively toss those results out the window.
CONCLUSION
Good investment managers can be found in a multitude of places, including third party databases, internal or external contacts, newspapers, magazines, journals, television, and so on. However, along with the good investment managers, you will likely find many more that are not all that good or are just not a good fit with your specific investment objectives or goals.
Most databases include information on thousands of different invest- ment firms, so the investment manager analyst must reduce the list of pos- siblecandidates to a list of probablecandidates. This is done by applying both quantitative and qualitative restrictions to the universe of appropriate investment products. The results of these largely mechanized screens must then be overlaid with some good old-fashioned common sense. The result is a short list of investment products that better enable the investment manager analyst to focus the search efforts on investment products that are appropriate candidates and have a realistic possibility of being hired or be- ing included in the manager bench.
Now that we have stated our investment objectives and screened for a short list of investment products that meet our needs, we can almost start the analytical process. But first, we need to contact the managers in the short list and request basic information about their individual firms and the underlying products we are looking to review. Chapter 3 introduces a means of requesting this information in an efficient way.
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CHAPTER 3
Request for Information
N
ow that we have set our internal investment guidelines and created an initial list of investment managers that we need to look into, it is time to start the data collection stage—formally known as the request for informa- tion (RFI).So far, we have a lot of information that we have combined from a number of different sources. This information has allowed us to make some quick qualitative and quantitative assessments of the managers from the initial universe (the initial universe in the small-cap value screen highlighted in Chapter 2 initially included 150 small-cap value prod- ucts). As a result, some managers were eliminated and others were added. While this information is very helpful, it is only the tip of the ice- berg. In order to properly perform a comparative analysis and ultimately select a manager for hire, we will need information directly from the in- vestment managers.
FORMAL QUESTIONNAIRE
Many firms elect to send out a lengthy questionnaire at this stage. These questionnaires tend to be massive, often in excess of 40 pages—particularly those sent out by consulting firms. However, I do not believe that this is ap- propriate or efficient at this stage because many of the managers that we have identified will be quickly eliminated after we have performed a prelim- inary review based on responses to the initial RFI. It is a bit unfair to ask all the managers to fill out a massive questionnaire, when just a few data items will suffice. We will send out our own version of the formal questionnaire later in the process—once we have narrowed the list down further. This way we can avoid wasting managers’ time and ours as well. It is a simple matter of efficiency—formal questionnaires take a long time to fill out, and they take a long time to review as well.
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