Fund information should be consistent, structured and available to investors of all sizes, say Jauri HÃ¤kkÃ¤ and Roland Meerdter of the Association of Professional Fund Investors.
Professional fund investors are facing new challenges. As with other industry groups, the customers of wealth managers expect a more personalised service and set of investment outcomes. Fortunately, perhaps, the techniques to access both capital and capital markets have become more diverse and specialised, creating a wider universe of investment vehicles to meet these tailored demands.
However, these developments bring a challenge for the professional fund investor. They must understand a much larger universe of funds both to provide the best outcomes for their customers and to ensure they are informed of a wider array of risks.
The Association of Professional Fund Investors (APFI) is focused on helping fund investors develop and strengthen their processes – and thereby the outcomes for their clients.
In an age of big data, professional fund investors are final arbiters of useful information from noise. But how do they ensure they are making the right decisions and avoiding the wrong ones?
The days of relying on past performance to drive fund selection are waning – at least they should be! Qualitative information about investment processes, personnel and risk management are key elements of a thorough approach to fund due diligence. Without an assessment of detailed qualitative criteria, factors crucial to the future success of a fund may slip review and ultimately lead to poor decision-making and poor outcomes.
The qualitative portion of the selection and monitoring processes are highly dependent upon the collection, analysis and comparison of a wide range of data points.
While plenty of information is available from investment managers in the form of pitchbooks and factsheets, real research and due diligence requires a much deeper level of information-gathering. For the growing majority of investors around the world who operate a sophisticated approach to the analysis and selection of funds, a proprietary due diligence questionnaire or request for proposal (DDQ/RFP) is typically issued to a manager. Professional fund investors across the globe are increasingly asking for more information from managers.
But qualitative information, by its very nature, is often unstructured. Fund investors have to intellectually marry up information across a variety of documents and responses to look for consistencies, inconsistencies and changes over time. The comparison process is laborious and slow. At APFI, we believe it can be improved.
In recent months, APFI has surveyed a wide range of professional fund investors from around the world seeking to understand the nature of the documents that they issue to managers to gather information. What our survey found is likely not to surprise anyone (particularly the investment management companies responsible for completing them). While DDQs/RFPs come in a range of shapes and sizes, the areas of focus overlap substantially. For the vast majority of questions and topics for which information is requested, there is a difference without distinction between the requests issued by professional fund investors around the world. When taking what might be considered the most robust sample documents into consideration, their content covers the vast majority of questions addressed in other documents.
There are slight variations in the way questions are asked and their order differs but APFI found that about 90% of information requested is consistent. APFI believes that a standardised series of documents will enable the establishment of best practices along with substantial efficiencies for all parties involved.
Standardisation will help fund investors improve transparency of information and communication from investment managers. Fund investors could compare funds across multiple qualitative factors and across a wider range of investment vehicles. Changes to information, such as fund manager team turnover, could be highlighted more easily to ensure risks are managed more effectively.
Standardisation will drive more democratic access to information in fund selection. While the world’s largest investors have historically received exceptional access to information, APFI is exploring technologies to enable higher and more even levels of participation for fund investors of all sizes and locations.
In response to regulatory demands for better protection and outcomes for customers around the world, APFI is considering ways of democratising fund information so that fund investors representing smaller pools of money are provided the same levels of access and transparency as their larger counterparts to crucial information about funds. Clearly, while fund information will be more transparent, the skill and experience of the fund investor will be more visible.
STANDARD, NOT HOMOGENEOUS
Professional fund investors around the world utilise a broad array of techniques and approaches to selecting funds. Some analysts are highly focused on investment process and delve deeply into the specific trades executed by managers; other analysts are more focused on the manager themselves, trying to understand the complexities and nuances of both past and future decision-making.
APFI values and respects the broad array of approaches utilised by fund investors around the world. In fact, we believe that homogenising the investment process, through simplified algorithmic tools or by all fund investors utilising the same data points for decision-making, leads to herding and heightened risks. The level of expertise and experience of the men and women tasked with the analysis of funds has grown immensely. Once incorporated into a subset of responsibilities at banks and advisories, the position of fund investor has truly taken on a level of professionalism to match that of fund managers themselves. There is no ‘one size fits all’ approach to fund selection.
We believe that while much of the information asked of managers is consistent, there will likely always be a range of areas that some fund investors will focus on uniquely. These areas that offer unique insights are not subject to standardisation.
We live in a world where information is becoming widely available but where skill lies in separating valuable information from “noise”. To support its members and drive best practice, APFI is standardising the information requests from investment management companies. Our vision is to deliver much wider and more consistent sets of qualitative information to make our members’ processes more effective and skills more pronounced.
Jauri Häkkä and Roland Meerdter are board members of the Association of Professional Fund Investors
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