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How To Source Smarter than Investment Manager Databases

How to find "The One".
It is common for asset owners to start a search by sourcing asset managers using databases. Understanding how databases are composed and how asset managers interact with them is critical to comprehending their usefulness. Here are 5 reasons long lists miss managers, and how it can be avoided.

1. Not All Track Records are Captured

Asset managers can be measured in two dimensions: number of strategies and people. They range from single strategy boutiques to multiple strategy power houses. But despite these extremes in scale, their common challenge is resources.

Asset managers can be measured in two dimensions: number of strategies and people. They range from single strategy boutiques to multiple strategy power houses. But despite these extremes in scale, their common challenge is resources.

Boutiques may run a limited number of strategies, but they also employ a limited number of sales & marketing people. As such, committing resource to upload their data to all available databases results in a compromise, whereby only a few databases, or none(!), will be selected.

The power houses may appear to have more resources, but they also have more strategies. So their compromise is to select a strategy focus list & post these to the main databases. This under-representation has also worsened due to the continuous M&A activity seen across the industry. As power houses have grown in size & number of strategies, an even smaller subset of their full capability set is accessible via databases.

"Not all boutiques upload to (all) databases, and not all power houses upload all strategies."

2. The Category You Need Does Not Exist

The most common issue is the misalignment of database categories with asset owner mandates. Today investors often have complex, highly  customised mandates designed to capture very specific exposures and exclude others. eg in EMD, Global Fixed Income… Or they wish to invest in strategies for which no dedicated database category exists. eg Factors, Impact investing, Infrastructure debt…

But this is also an issue for asset managers who often struggle to find a category with a currency policy that matches closely what they do. “Global Equities” will contain track records driven by fundamental, quantitative, all cap, smart beta, best ideas, thematic, & unconstrained approaches. Whilst category segmentation has improved, many asset owners today still screen on product names!

Digging deeper, there are multiple manager opportunities which asset owners may want to know about, but which they will not find in databases. Specifically: New innovative strategies which are in internal incubation and where fee incentives are available; closed hedge fund managers interested in running mandates against their more liquid long only book; strategies that may not actually be closed for the right strategically important investor; and of course, the numerous private club deals.

"Categories are broad catch-all segments which are not sub-divided by process or risk exposures."

3. Composites Have Their Limitations

Composites are by definition a collection of similarly benchmarked underlying client portfolios. The underlying portfolios may have very different and dynamically changing investment guidelines. This can cause significant composite dispersion, whose bias can go either way. For example, in the low vol space (e.g. fixed income), the composite dispersion can be large enough to shift the track record up/down quartiles.

Additionally, restatements and manager changes can impact the usefulness of a track record, but these are not always explicitly flagged. At least, not in databases.

The most common issue is the misalignment of database categories with asset owner mandates. Today investors often have complex, highly  customised mandates designed to capture very specific exposures and exclude others. eg in EMD, Global Fixed Income… Or they wish to invest in strategies for which no dedicated database category exists. eg Factors, Impact investing, Infrastructure debt…

"Screening on performance can exclude good managers, and include managers you won’t want."

4. Performance Data Alone Is Not Sufficient

Asset manager selection goes beyond performance data. From an investment due diligence perspective, the qualitative factors that drive a track record are arguably more important eg people, philosophy, process, portfolio… Moreover, operational due diligence requires deeper data on the firm, risk management, operations, compliance, legal… This data is not collected by classic databases.

For a full investment and operational due diligence process, asset owners spend weeks collecting the vast majority of qualitative data they need to do their job. eg via the web, or direct from asset managers via calls & mails. But this takes time, and there are too many managers globally to cover personally. This limits the ability to source wider and evaluate more managers deeper.

"Manager selection teams end up doing most of the data collection themselves."

5. One Database Is Never Enough

Asset owners build diversified portfolios across asset classes. This in turn means that multiple database subscriptions are necessary - traditional  asset classes (long only equity, fixed income…), private equity, (Fund of) hedge funds, non-listed real estate etc…

But as institutional investors know, databases don’t come cheap. The recurring annual fee per database ranges from USD 10k to USD 250k+ depending on the number of sub-databases and users in your team. Budget is not always justifiable given the number of searches an asset owner performs each year within a specific asset class.

"Databases don’t come cheap, and are not always justifiable for an occasional search."

How The Largest Asset Owners Source Today

Asset owners have historically used multiple tools and sources to get their job done. Databases helped, but to fill the gaps, they relied on search engines, asset manager sales people, emails & attachments, excel, word, phone, pen & paper. This classic toolset has not evolved in 20 years.

As the fiduciary & regulatory demands on asset owners has increased, the classic toolset is no longer sufficient for their job. Today they operate in a world of higher transparency, stricter governance and performance scrutiny. The pressure to find the best managers globally and justify their decisions is at an all time high.

To learn why many of the largest asset owners now use RFPnetworks to get the job done, get in touch.