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Due Diligence

Jon Williams with Manulife Securities and Williams Financial Group.

As a Chartered Investment Manager and financial planner, one of the most important roles we play for our clients, is pick the money managers that we utilize to run a portion of their portfolio. There are 8 key attributes that are consistent among top money managers, today I’m going to share 4 of them with you.

My name is Jon Williams, Senior Investment Advisor with Manulife Securities and Williams Financial Group.

Last week our team, including Wayne Gray & Daniel Greer had our annual due diligence day. The purpose of this, is todo a thorough review, of each of the money managers that we utilize for building our client portfolios. We compare them to their peer-group, talk with the portfolio managers to get an update and ultimately, determine if we are going to be using them in our client portfolios on an ongoing basis. Or are we going to “fire” them and replace them with another manager, that we feel is going to more consistent in providing lower-risk out performance.

I will share with you, that in this process, we have fired one bond manager and one of the equity managers -- on average we do make 1 to 2 changes each year as a result of our due diligence day, yet there is a core number of managers that haven’t changed in the past 7 years.

The next question is, What do we look in a portfolio manager or mutual fund company for that matter – in order to consider them to be part of our recommended portfolio? As I mentioned, there are 8 key attributes that we look for – but I’ll start with 4.

In 2006 there was a report produced from the Yale School of Management called "How Active is Your Fund Manager" - it focused on something called "Active Share" - which is a measurement of how different a portfolio is to the index. the study concluded that the more "Active" or different that a portfolio is - the higher the annualized out / and or under performance.

- so we look for managers with "High active share" and consistent out performance

The next item, is that we look for funds that have a relatively small number of businesses - which reflect ideas of the portfolio manager, of which they have high conviction. According to a research report published in 2010 by Choen, Polk & Silli called "Best ideas" - funds that concentrate their holdings in their best ideas have outperformance the market by 4 - 10% annually.

The next item I will share with you - is that money managers that focus on business fundamentals, not computer algorithms also out-perform. In the same Yale study, - funds that focused on stock selection had better returns, then those what made market timing calls – it showed that these calls aren't rewarded in the market and actually tend to destroy value for fund investors.

- which if we look at the overall industry and one of the most successful investors - Warren Buffet, you would see that this is one of the fundamentals that he believes and has proven to work out extremely well.

The last item I will mention that is fundamental -- is that money managers need to be on the same "side" of the desk as the investor. The way we make sure of this - is that the manager owns a significant amount of their own fund.

- According to a morningstar Research Report in 2011 - of the 7,700 funds that morning star tracks, nearly half are run my managers who don't have a single penny in their own funds.

- In the same study, they also determined that managers with a minimum of $1 Million in the funds they manager have outperformed the majority of their peers over a five-year timeframe.

My goal today was to provide some information and education on the "qualitative" attributes that we look for in the money managers that we utilize in client portfolios. I hope you found this informative and if you would like to have a further discussion on our process - please feel free to call or email our office.



Cremers & A. Petajisto, “How Active is Your Fund Manager?” Yale School of Management, 2006.

Antti Petajisto, Active Share and Mutual Fund Performance. December 15, 2010.

R. Cohen, C. Polk, B. Silli, “Best Ideas”. Social Science Research Network, 2010.

Morningstar Research Inc. “Want Fund Managers on Your Side? Pick Those That Walk the Line”, January 2011.