Picking the right investment managers is a central challenge for any institutional investment program. The selection process can be complex, encompassing evaluating everything from track records to operational and personnel practices.
Criteria widely used to evaluate managers are known as the P's: people, process, parent, partnership, philosophy, price, and/or performance. While some are expressed numerically, most are qualitative in nature. Much of the information on topics such as culture, adherence to strategy, risk management and alignment of interests is typically gathered via questionnaires and manager interviews — in other words, qualitatively.
These questionnaires and manager interviews often can be supplemented with a variety of quantitative insights. And now, following the shift to virtual meetings from on-site visits, less time spent traveling has opened up the opportunity for more information gathering and quantitative analysis before meetings with managers.
That quantitative analysis starts with the most quantitative of the P's: performance. When evaluating an active manager, it's easy to look at past returns on both an absolute basis and relative to benchmarks and peers. But the results of those analyses won't explain how the manager achieved those returns. It is through factor analysis that investors will find answers to a series of critical questions and determine whether managers are meeting expectations and delivering what they claim.