While the jargon surrounding institutional investing can seem impregnable at the best of times, the emergence of terms like “pregnant alpha” in due diligence discussions with prospective managers are leading even the most ardent logophiles to draw the line.
In response, funds are using a growing array of tools to clear away the waffle and fluff, and cut straight to the cold, hard truth of a manager’s track record and reputation.
Catalysed by Covid-19, data is becoming an increasingly powerful tool to get more out of the due diligence process when selecting funds managers. At Investment Magazine’s Investment Operations Conference in late March, Alex Wise, Head of Australia at Castle Hall, said technology was enabling asset owners to benchmark managers against their peers and the market more broadly, quickly audit their reputations, and use data rooms for sensitive documents to bring both transparency and security.
Speaking on a panel about conducting virtual due diligence, Wise explained the term “pregnant alpha” was used by a manager to refer to something that may not be performing now, but will be in around nine months’ time (if all goes to plan).
Presumably the manager was talking about a human pregnancy and not an elephant which has a gestation period closer to two years, Wise said.
In another case a manager that claimed to be ESG-focussed turned out to be only talking the talk.
“We have one manager where we went in and we look at all that proxy voting records and for that particular manager, they had not voted against management, they voted with management on every single anti-ESG shareholder resolution that had been put to them,” Wise said.
“So with all these types of representations, it’s really about verification. Yes, we want to have a trusted relationship with managers, but you really do have to put the diligence and the verification into effect…The waffle and the fluff can obfuscate what is going on in the background. “
Rick Di Mascio (pictured), founder and chief executive of Inalytics, said the impact of Covid-19 has brought the genie out of the bottle in relation to digital due diligence.
“I think the thing that’s changed in the last year is it’s a recognition that data science can fill the gap that remote due diligence has created,” Di Mascio said.
“It allows us to analyse a large number of managers really quickly and efficiently and actually identify their investment skills in a way that that really wasn’t possible say several years ago.”
An audience poll during the session, including representatives from many of Australia’s leading funds, found 48% believed pre-appointment due diligence work should take between 13 and 24 weeks.
But Di Mascio said Inalytics had just finished a due diligence process on 65 managers for global equities, and the process took six weeks between getting hold of the data and reporting back to the clients.
“Not only did it take half of the time,” Di Mascio said. “We have not worked with this European pension firm before, [but] the level of knowledge that they had on their managers just far exceeded anything they’d had before, so it’s both highly efficient and really effective.”