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Uncovering Investment Talent: An Asset Manager Due Diligence Overview

Mark Warren portrait photo

   By Mark Warren, CFA, CIMA
   Manager, Public Equities
   August 26, 2022

We recently launched a video series called Unscripted where I pick the brains of Wespath's third-party investment experts, or "asset managers," to learn how these investment minds consider the biggest opportunities and challenges within their specialized areas of the markets. But I often wonder whether viewers are curious about how we uncover these talented firms in the first place. In a universe of thousands of asset managers, where does Wespath begin?

As a fiduciary responsible for the assets of over 100,000 participant and 140 institutional investors, Wespath endeavors to invest with exceptional asset managers and hold them to the highest standard. Our robust, repeatable and holistic due diligence process is designed to be thorough, unbiased and inclusive of our cross-functional team that offers diverse perspectives.1 We seek managers that are aligned with our investment philosophy and Investment Beliefs.

We start by defining the investment mandate, or specific investment strategy, we are seeking for investment. For example, an equities mandate might be "U.S. small-cap growth stocks" or a fixed income mandate might be "global bolds." We then construct a request for proposal (RFP) questionnaire, customized to the specific mandate, to be completed by a group of prospective managers.

Customizing the questionnaire

The questionnaire seeks to understand the asset managers' four P's: People, Philosophy, Portfolio and Performance. We want to develop a thorough understanding of these four areas—including the ins and outs of the asset managers' firm and people, governance structures, risk management and portfolio construction processes. We ask about the nuances and competitive advantages of their firm and investment strategy—for example, as it would relate to a "U.S. small-cap growth stock" mandate: How do you define the small-cap growth universe of stocks? How do you manage the inherent illiquidity risk in many small-cap growth stocks?

Identifying manager candidates

Next, we identify a select pool of five-to-ten qualified manager candidates that we ask to complete and return the RFP questionnaire. This carefully constructed list of potential managers is formalized only after a great deal of investment team brainstorming and research. Wespath's investment staff have a diverse range of backgrounds within financial services, resulting in an extensive network that can help source new talent. This process is enhanced through our use of external databases, like eVestment and Wilshire Compass, to provide asset manager investment strategy performance over various market cycles, and asset manager universe rankings. Wespath also considers asset managers that are majority-owned by women and/or minorities, as we believe these firms apply a unique perspective to asset management that adds value and enhances long-term performance of our funds.

Selection of manager finalists

We then assemble a cross-functional team comprised of individuals from across our Investment Management, Risk and Analytics and Sustainable Investment Stewardship groups to evaluate and score the completed asset manager RFPs. We are looking to identify the following:

  • Firm stability absent legal or regulatory issues
  • Strong investment governance
  • Deep investment research capabilities regarding the investment strategy
  • A tenured investment team with advanced degrees and extensive experience during various market environments
  • An investment philosophy and process that is repeatable, differentiated and integrates material sustainable investment considerations

While we typically seek managers with proven performance success over different market cycles, we also aspire to identify new investment ideas or innovative approaches if our in-depth analysis gives us conviction in these new strategies.

Finally, we perform internal analysis on the asset manager's strategy and performance, including its composition and biases, correlation with other investment strategies within the Wespath fund, and other risk and performance metrics.

Following RFP scoring, we select approximately three to five asset managers to move forward in the process. We schedule virtual meetings with senior members of these asset managers' investment teams to review their information in more detail.

Final presentations

Following the virtual meetings, the top two to three firms are asked to formally present on their organizations and strategies to our entire investment team in hour-long, back-to-back presentations at Wespath's headquarters. This provides an opportunity for the Wespath team to learn more and ask any questions. Immediately following the presentations, the investment team conducts an in-depth discussion regarding the benefits of and concerns with each asset manager, as well as how the managers compare. The Chief Investment Officer (CIO) approves the manager selected for additional due diligence.

Onsite due diligence

Once we select an asset manager as the finalist, members of the Wespath investment team schedule an onsite visit at the asset manager's headquarters to meet with senior management, portfolio managers, analysts, trading, compliance, and accounting personnel to achieve a more comprehensive understanding of the organization's culture, work environment and team dynamics. The visit often includes an in-depth demonstration of the research tools and models used to make investment decisions. Following the onsite visit, we check references , and if the Wespath team is satisfied, we prepare a formal investment recommendation, which the CIO reviews and signs.

Ongoing oversight and monitoring

But our work doesn't end there—this is just the beginning. Once we've engaged an asset manager, we continue to closely monitor the firm and the extent to which they are fulfilling their investment mandate on a daily basis for as long as we invest with the asset manager. Wespath develops investment guidelines for each manager to ensure it adheres to our expectations for the assigned mandate, including the approved universe of investible securities, portfolio cash limits and individual security limits. We also closely monitor for key personnel turnover, governance concerns, significant changes in investment philosophy or process, and unexpected underperformance, as well as outperformance. If we identify a change in the management of our portfolio that could introduce an unacceptable new risk, or jeopardize the manager's ability to achieve performance objectives, we address it immediately.

It takes the entire "investment village" to uncover the right asset manager for each new investment mandate as well as to continuously monitor that manager. We believe that our disciplined and robust process for identifying, selecting and monitoring our investment managers has been a strong contributor to our funds' proven track record and long-term success.

1 While this process holds true for public market asset managers, the due diligence process for alternative asset managers differs slightly due to the particular nuances of the alternatives asset class.

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