The Investment team follows a disciplined and rigorous process to source, analyze, and monitor investment managers. Our default position is to always use a passive approach at the lowest possible cost, unless we can identify an active manager that we believe with high conviction will outperform an appropriate benchmark net of all fees and expenses.
As an institutional investor we receive a great deal of transparency from potential and existing managers (much more than a typical individual investor would receive), and we feel this level of transparency is necessary in order to effectively evaluate active managers. For example, for most prospective public equity managers, we typically receive their entire list of positions and the size of each position in the portfolio on a monthly basis going back many years. We then employ a variety of quantitative tools that use this data to produce reports with detailed performance attribution, factor exposures (e.g. value, growth, momentum), contribution to return from factor exposures, risk exposures, sector and country exposures, trading history of each position, and other useful information.
UTAM is a firm believer that efficiently using quantitative analysis is a necessary but not sufficient component of a best in class manager selection process. The other component that is required is good judgment and qualitative analysis by an experienced team of investment professionals.
Across the eight-person team there is extensive experience in manager selection and monitoring and, at the senior levels, a well-developed skill set in identifying and selecting suitable managers. The team currently has six CFA charterholders and five with advanced degrees. Everyone on the Investment Team is encouraged to become a CFA charterholder.
In addition to the Investment Team, UTAM also has a separate Operational Due Diligence (OpDD) team that is responsible for evaluating managers from an operational perspective. OpDD reports to the Management Investment Committee and has a right of veto over any investment in respect of operational issues. Below we summarise our typical manager selection process from sourcing through to investment and monitoring.
|Manager Selection and Monitoring Process:|
|1. Sourcing Managers||UTAM evaluates hundreds of managers every year. Key sourcing methods include manager databases, unsolicited calls and emails from managers, conferences, networking with peers, networking with existing managers, and the experience of the UTAM Team.|
|2. Initial Screening and Review||The initial screening consists of reviewing marketing material and often includes running a quantitative analysis of returns to quickly determine if there might be a potential fit. If there’s still interest after the first pass, we request a call or meeting with the manager to better understand their organization, investment team, investment philosophy, investment strategy, level of transparency they are willing to provide, and fees.|
|3. Investment Due Diligence (IDD)||For managers who make it to this stage of the process, we focus on the “5 P’s” – People, Philosophy, Process, Performance, and Portfolio fit. We also compare the manager’s characteristics against a list of desirable characteristics that we think lead to an above-average probability of a manager outperforming a UTAM determined benchmark in the future. We spend considerable time at this stage analysing position level information and conducting calls and meetings with the manager’s key investment and risk decision makers.|
|4. Operational Due Diligence (ODD)||Once the Investment Team determines that it is reasonably likely to recommend an investment, an ODD review is initiated. This review focusses on the identification, evaluation, and assessment of a manager’s operational risk and the particular investment vehicle under consideration. This includes, but is not limited to: management structure, sufficiency of key operational processes, regulatory and control environment and policies and procedures. Specific factors such as portfolio valuation, business continuity planning, compliance controls and cash controls are also assessed.|
|5. Risk Analysis||The Risk and Research Team is responsible for incorporating all investments into our third-party risk system. Prior to an allocation, the Risk Team calculates the expected risk contribution of the potential new investment. Using this information, we can make a more informed decision on how much risk to allocate to each manager and focus our efforts on those managers and strategies that offer the highest expected return for the amount of risk used.|
|6. Manager Recommendation||All allocations must be approved by UTAM’s Management Investment Committee (MIC). In order to evaluate potential allocations, formal IDD and ODD reports are prepared by the Investment and ODD Teams, respectively. The IDD report provides a detailed account of the IDD process and findings, and can range from 50 to more than 150 pages. The ODD report describes the review undertaken, and its findings, and includes a detailed account of key operational risks and mitigations (if any). It concludes with both a recommendation to the MIC and a list of any operational improvements identified as necessary conditions for investment. After reviewing and discussing both reports, the voting members of the MIC decide whether to approve the allocation. It is important to note that the ODD Team has a right of veto over any investment in respect of operational issues.|
|7. Monitoring||After an allocation, the Investment Team typically has at least quarterly touch points with each manager. The focus of the monitoring process remains on the “5 P’s” and includes an assessment of realized performance taking into account the market environment and how we expected the manager to perform in that environment. The ODD Team also undertakes periodic reviews based on its original assessment of operational risk and to consider operational changes.|
Quotes from a third-party review of UTAM’s Investment Office by a leading global advisory firm in 2014:
Managers respect the University of Toronto team in terms of their level of engagement and thoroughness.
UTAM’s diligence and monitoring are among the top 5-10 in terms of thoroughness.
UTAM’s process is rigorous and detailed without being wedded to a checklist; they focus on the right questions.
Managers also commented on the quality of UTAM’s operational due diligence.