LO 72.3: Identify themes and questions investors can consider when evaluating a

LO 72.3: Identify themes and questions investors can consider when evaluating a manager.
Manager evaluation is not a task that should be taken lightly by potential investors. This process can be broken down into four areas including strategy, ownership, track record, and investment management.
General questions regarding a managers strategy may include: Does the manager follow a particular investment style (e.g., growth, value)? Are there any current trends in the fund or specializations in specific securities,
industries, or sectors?
How has the fund changed its investment style or rebalanced its holdings over the past
year? What changes are contemplated in light of anticipated market conditions?
What is the extent of turnover and liquidity in the fund? What market signals are used to
determine whether to exit or enter a position?
What mechanisms are in place to limit any potential losses in the fund? To what extent is quantitative analysis and modeling utilized in the investment process?
Have any models been developed or tested to date?
Are short sales used to generate excess profits or to hedge? How successful or detrimental
Are derivatives used in the portfolio? If so, are they used for hedging or speculative
How does the trade execution process work? Does a central trading desk exist for
have they been so far?
maximum efficiency?
overall investment strategy?
What is the extent of any investment in private company securities and their role in the
What is the tradeoff between maximizing current returns versus long-term fund growth? Has the fund ever been closed or provided investors with a return of capital?
Ownership interests often help align the interests of the investment team and the investors. They can be useful in attracting and maintaining quality staff, thereby enhancing and/or continuing to generate strong investment returns for investors.
Therefore, potential investors should inquire as to whether any members of the investment team (e.g., traders, portfolio managers, research analysts) have ownership interests in the firm.
2018 Kaplan, Inc.
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Topic 72 Cross Reference to GARP Assigned Reading – Mirabile, Chapter 12
Track Record
Specific questions about the managers and funds track records may include: How does the past performance of the manager and/or fund compare to its peers and/or
funds that follow the same or similar investment philosophy?
Has past performance been audited or verified by a third party?
Is there sufficient performance history to perform trend and/or attribution analysis? How did the manager or fund perform during market downturns?
What were the investment returns relative to the size of the investment assets? Are most or all of the staff on the investment team that generated those past results still
employed by the firm?
Investment Management
Inquiries during manager interviews may include: What is/was the managers investment strategy for generating excess returns? How did the manager cope with tough market periods? Reference checks on managers could include the following individuals:
Former employers: Was the manager a leader or follower? Proactive or reactive? A team player or individualist?
Current and former colleagues, clients, and other independent parties: Ensure
consistency but if there are mixed reviews, follow up for explanations and/or obtain clarification from the manager.
Current and former investors: What good and bad investment experiences did they have
with the manager?
Background checks on managers may include the following questions/activities: Obtaining comprehensive background check reports on the manager. Review the Form ADV filed by the manager with the SEC and state securities
authorities. It contains general information about the business as well as more detailed information such as fees, services provided, conflicts of interest, and background of key personnel.
Has the manager consistently demonstrated herself to be a person of integrity? This
could be verified by examining public databases and the SEC website to look for any past or current instances of litigation or criminal behavior.
Has the manager demonstrated strong personal financial responsibility? This could be
verified by examining personal credit reports and bankruptcy reports.
Are the managers stated representations accurate? This could be verified by inquiring
with auditors and brokers who are currently working with the manager or have worked with the manager in the past.
What is the extent of the managers involvement in any related party transactions?
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2018 Kaplan, Inc.
Topic 72 Cross Reference to GARP Assigned Reading – Mirabile, Chapter 12
Ris k M a n a g e m e n t Ev a l u a t io n