INVESTMENT MANAGER SELECTION Flashcards
What are the three components of due dilligence process
Manager universe : Find a manager who is suitable for the portfolio in terms of objective and constraints of the IPS, invest in the required style. No performance evaluation is being done at this point.
Quantitative analysis : Evaluation of the performance of the manager.
Qualitative analysis : Two issues will be assess here. What is the likelihood that the same level of returns will continue in the future? (2) Does the manager’s investment process account for all the relevant risks?
How can we assess the probability of continuity of returns of a manager
We can assess using the fours Ps
Philosophy : Focus on a specific area of market inefficiency to earn excess returns.
Process : Is the strategy feasible
People : Do we have the necessary skills and knowledge with the employee in place.
Portfolio : Must be build in a way to express that philosophy and process
What are the different type of errors that can be made when choosing managers.
Type 1 error : We choose a manager that end up underperforming.
Type 2 error : We didn’t choose a manager and that manager ended up outperforming
What are the two different broad type of inefficiencies to be considered
Behavioral ineffiencies : Mispricings caused by other investors and their behavioral biases
Structural inefficiencies : Occurs because of laws and regulations
Describe the capacity issue related to inefficiency
Capacity refers to the amount, repeatability and sustainability of the inefficiency.
What are the common behavioral biases that investment teams’ performance can be affected.
Groupthink : Team want to minimize conflict so they maintain consensus instead of sharing their real insights
Authority bias : Involves deferring decision to group members that are perceived to be subject matter experts.
Aversion to complexity : When too much attention is given to small details instead of concentrating on the bigger picture.
What are the steps of the investment decision making process
1- Idea Generation
2- Idea implementation
3 - Portfolio construction
4- Portfolio monitoring