Investment Manager Due Diligence Process
Planning Capital Management’s comprehensive due diligence follows a four stage
multi screening process of over 15,000 mutual fund and private account managers
that provides a thorough and objective assessment of Investment Managers.
Step One: Initial Manager Search Phase
Quantitative Investment Manager Search
Performance Screens are the starting points in our research process. We consider
funds that have outperformed their peer group and benchmarks over a reasonably
long period of time. Generally we require a minimum of five years of performance.
However, occasionally we will consider Investment Managers with a shorter record.
We are also willing to take into account a fund manager’s separate account record
prior to the fund’s inception if we believe it is representative of how the existing fund
would have performed over the same time period. In addition to absolute
performance, we take into account:
Sort into 16 asset and sub-asset classes
Performance consistency relative to the fund’s peer group and benchmarks
Special factors that impacted performance that may not be repeatable
The level of assets on which the record was based
Step Two: Qualitative Manager Assessment
Qualitative Screening Process
Questionnaire & Interview Process is applied after the Investment Manager passes
our quantitative screening. The investment management firm is sent a detailed
questionnaire. Our questions delve into the detail of the investment process, the
investment team members, their incentives, growth plans and portfolio management
policies. After reviewing the responses to our questionnaire we then set up an
interview with the lead portfolio manager(s). Our objective is to re-visit many of the
questions in the questionnaire and fill in gaps. This is an important part of the
process because it allows us to begin the qualitative assessment of the manager’s
discipline and skill. We ask for examples as we attempt to verify if the manager can
describe real experiences that are in line with how the investment process is
articulated. We also want to understand the reasoning behind the manager’s
investment philosophy and process. If after this interview we have a favorable
impression of the manager’s investment process, discipline in executing that process,
and plans for managing growth, we move on to the next step.
Step Three: Fundamental Analysis & On-Site Visit
Fundamental Analysis leads to an on-site visit. Our objectives are to spend more
time with the manager(s) and also visit with the analyst team. In doing so we seek to:
1. Further explore the manager’s discipline. We often do this by questioning the
manager about stocks he owns. We look for consistency between the way the
manager describes his/her investment process and the stocks actually held.
We want to know if the way that each stock was researched and the
justification for the buy decision are in line with the investment philosophy. If
we find inconsistencies this tells us that either the manager is not disciplined
in executing the strategy or their description of their investment process was
2. Determine if there is consistency among all team members. By talking with
members of the analyst team we can be assured that everyone is on the same
page and gain further clues as to whether the process is executed as described.
3. Evaluate the quality of the team.
4. Evaluate the culture and incentive systems so we can determine if the team is
likely to stick together. We look for firms that have healthy work
environments. We believe stability is a critical element in the ability of an
investment organization to stay focused.
Step Four: Recommended Private Account & Mutual Fund Managers
The Bottom-Line is what are we looking for in this time consuming and labor
intensive process is for managers with an identifiable edge that we are highly
confident can be maintained. Specifically this translates into the following:
1. The investment manager must have an investment process that is disciplined.
Though there are some highly intuitive investors who are successful, we
believe a disciplined process helps to avoid decision errors that result in
sloppy, incomplete analysis. We simply have less confidence that highly
intuitive vs. disciplined managers will be able to maintain their success.
2. The investment process must give us a reason for believing the manager has
an edge. Sometimes the edge is the level of passion that results in an
obsession with knowing companies so well that there is an information edge.
Other times the process results in a unique way of looking at companies that
can lead to better insights. Some managers will focuses on spin-offs and
restructurings, a universe where a manager has superior knowledge. Other
managers will do complex scenario analysis of companies that leads to a level
of understanding that other stock pickers can't get from one-dimensional
analysis. Some managers gain their edge from a combination of factors such
as an incredibly high level of discipline that allows them to minimize decision
errors and an obsession to know their companies better than their competition.
3. We require that the stock-picking team be highly focused with few business or
marketing distractions. They must not be running too many different
investment products that may pull them in too many directions.
4. We must be confident that the team will be stable and that business growth
will not be at the expense of returns to existing shareholders. We don't care for
Planning Capital Management may perform this process independently or with a third party consultant hired by Planning
Capital Management Corp.