In our previous article we started at the top and looked at how we assess the corporate structure and quality of a DFM firm.
In this article we drill down into the DFM’s investment proposition, the philosophy and process and the mechanics by which this is delivered to underlying client portfolios. We also consider how robust the firm’s risk control and monitoring functions are.
Firstly, what is the overarching investment philosophy of the firm. How do they believe they can generate alpha and add value to client portfolios?
Is there a centralised investment committee which dictates a house view and asset allocation decisions across all of the firm’s offerings?
With most DFMs now offering a range of service propositions, it is important to ascertain if, and how, the same overarching investment philosophy is applied to all offerings. Assets which are held in a bespoke nominee account for example, may not be permissible on a retail platform hosting a model portfolio service.
What latitude do individual portfolio managers have to deviate from the central asset allocation and security selection guidance?
What are the various committees that contribute to the overall investment decisions?
Most DFMs operate some form of central investment committee which is typically led by the chief investment officer, with a number of sub committees reporting in, such as an asset allocation committee, stock and fund selection committees and so on. It is important to ascertain what role these committees play and the hierarchy and decision making processes employed.
Who sits on the various committees? What is their experience and what other roles do they perform within the firm?
What is the extent and capability of the firm’s in-house research function?
How well are the various research departments resourced and staffed? Here it is worth looking at the biographies and experience of the senior people within the research divisions.
What external research resources does the firm utilise?
Is research cost absorbed on the firm’s own P&L?
How many company visits/manager meetings does the firm typically conduct on an annual basis?
What is the firm’s stance on ESG matters?
Do they offer sustainable/ethical branded portfolios and/or is ESG embedded within the research process?
What type of securities will the firm invest in? For example, will they hold direct equites and bonds or do they purely utilise collectives. This may differ between their bespoke services and their model portfolio solutions. Would they hold Ucis funds, hedge funds, or funds falling under AIFMD for example? Do they invest in structured products, unlisted assets or crypto currencies?
What is their stance on derivatives and hedging?
The best centralised investment proposition in the world will only work for your clients if it is reflected in their individual portfolios. It is, therefore, important to understand how the firm communicates the latest house views and tactical asset allocation calls to the various divisions that manage client assets. For one size fits all model portfolio solutions, this should be reasonably straightforward.