For managers who make it to this stage of the process, we focus on the four P’s: people, philosophy, process, performance. We also add a fifth P, portfolio fit, which takes into account how the manager’s strategy fits with the other managers and strategies across the rest of the relevant portfolio. We also look at the alignment of interests between the investment manager and the investors in their strategies. Our IDD process includes both a qualitative assessment of the manager’s organization and its people, and a quantitative review of historical portfolio holdings (where available) and returns.
Moreover, we discuss and evaluate the manager’s responsible investing approach across various dimensions, including decision-making, active ownership, reporting and disclosure. Where relevant, we also evaluate the ESG-related characteristics, carbon footprint, and material ESG risks of the manager’s investment portfolio. We summarize our findings in a proprietary ESG integration rating for each manager and investment strategy that we invest in.
As an institutional investor, we expect a great deal of transparency from potential and current managers – far more than a typical individual investor would receive. This level of transparency is necessary for UTAM’s team to effectively evaluate active managers. For example, in reviewing public equity strategies, managers typically provide historical month-end holdings, which UTAM runs through sophisticated analytical tools to produce reports that include performance and risk attribution; factor exposures (e.g., value, growth and momentum); risk exposures; ESG scores, including carbon footprints; sector and country exposures; the trading history of each position; and more. This information helps us better understand the manager’s investment process and allows us to ask more targeted questions when interviewing the manager’s investment team about their strategies.
We believe that leveraging quantitative tools, while essential for a best-in-class manager selection process, is not sufficient on its own. We therefore complement our rigorous quantitative insights with qualitative judgment and experience, working as a team to make optimal manager choices that we expect will benefit our client over the long term.
Once there is a reasonable probability that the Investment team will recommend investing with a particular manager, we conduct a similarly rigorous review of the firm’s business operations, focusing on people and processes, including corporate practices such as equity, diversity and inclusion policies. We must be confident that a manager not only offers a promising investment opportunity but also operates a sound, well-run business.
In addition to our investment and operational due diligence processes, our Risk and Research team runs a risk analysis that includes calculating the expected risk contribution of the potential new investment to the overall portfolio risk. Armed with this comprehensive and independent analysis, we can make more informed decisions about prospective managers and strategies, focusing on those that offer the highest expected return for the amount of risk being taken.
All material allocations must be approved by UTAM’s Management Investment Committee. To help the Committee evaluate investment recommendations, formal IDD and ODD reports are prepared by the Investment team and the Operational Due Diligence team, respectively.
The IDD report, a detailed account of the IDD process and findings, including a section on ESG considerations. The ODD report describes the review undertaken and its findings, and also includes a detailed account of key operational risks and mitigations (if any), as well as specific ESG considerations within its scope, such as proxy voting and equity, diversity and inclusion policies and practices. It provides a conclusion on whether the manager’s operations are sufficiently sound and indicates any operational improvements identified as necessary conditions for investment. In addition to the IDD and ODD reports, for all new investments, the Committee also receives and considers risk, legal and tax diligence reports. After reviewing and discussing each of these reports, the voting members of the Committee decide whether to approve the allocation.
After an investment has been made, the IDD and ODD teams follow continuous monitoring and reporting processes. The Investment team typically connects at least quarterly with each manager. The focus of the monitoring process remains on the five P’s of our IDD review. The process includes an assessment of performance, taking into account the market environment and how we expected the manager to perform in that environment. We also conduct regular reassessment of operational risk to consider any relevant changes.
Alongside our ongoing investment and operational discussions, we continue to discuss and evaluate ESG and responsible investing practices with our managers, as we look for continued commitment to responsible investing and ongoing evolution of the manager’s approach.
For UTAM, choosing to work with an investment manager is not a one-time decision – it’s a continuous process of analysis, evaluation, dialogue and renewal.
