Due Diligence from a Distance
By Tom Brakke, CFA
January 6, 2009


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One advantage to visiting a management firm (unless you are there to sit through a carefully scripted dog-and-pony show, which is usually of no value) is that you get a feel for the organizational dynamics (a mix of philosophy, people, and processes, with a bit of culture thrown in) that will drive future investment performance.  Often, the real insights into how a firm works come not from meetings with a portfolio manager or the chief investment officer, but from others that you have the chance to interview.  The purpose is not to go for “gotcha” moments (although they sometimes happen); invariably the leaders of the best organizations can deal thoughtfully with whatever questions stem from the tidbits that you uncover.  But the process of uncovering them yields more insight than all of the marketing presentations you could possibly attend.

6 Questions to Start the Diligence Process

A thorough due diligence process includes many detailed questions about all aspects of an investment manager’s approach.  However, some general inquiries can often open the door to important avenues for investigation.  For example:

  1. Under what circumstances do you expect your strategy to produce subpar relative (or significantly negative absolute) performance?
  2. In your organization, are the attributes and risk profiles of portfolios actively monitored by a chief investment officer, or is the portfolio manager given free reign within their mandate and judged solely on performance after the fact?
  3. What are the parameters of the bonus structure for portfolio managers, analysts, and leaders of the organization?
  4. How do the members of the investment teams share information, including between specialists in different asset classes and strategies?
  5. What are the structural changes occurring in the markets that may require you to modify your traditional approach?
  6. What is your analytical advantage?
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