Professional sports teams build championship rosters through a rigorous evaluation process.   We scout money managers the same way.

We are "open architecture".  Industry speak for "pick the best talent available".  Pro sports teams don't draft players from only one school, and we don't limit ourselves to one firm.  We choose investment managers from across the entire industry to access talented investors, regardless of firm.

Managing our roster

We deliberately limit our roster size to create a curated, high conviction lineup where every spot is earned.  A smaller roster lets our analysts dig deeper.  Less breadth, more depth.  Every strategy we recommend is deeply researched and closely monitored.   

Three priorities drive our roster decisions:

  1. "House View" strategies express our convictions in your portfolio.  Our Investment Strategy team identifies attractive exposures.  These strategies deliver them.
  2. "Diversify to personalize" strategies expand choice beyond our House View.  Different risk profiles provide more ways to tailor a portfolio to fit unique goals.
  3. "Focus where we can win" guides us to invest our finite time and research bandwidth where we add the most value for our clients.       

Investment Due Diligence: Evaluating "on the field" performance.

Everyone loves a magic number.  In sports it’s the 40-yard dash, or the bench press.   “Workout warriors” are college athletes who run blazing fast 40-yard dash times or demonstrate herculean feats of strength in the gym only to flame out in the pros.  The investment world has its own "workout warriors" that post one exceptional period and never repeat their success. 

The is no single, "magic metric" that predicts future greatness in sports or investing.  We analyze an array of metrics to understand the drivers and characteristics of past performance. We look through what happened to understand why it happened. The “why” matters more than the “what” when assessing future potential.

"You can measure speed and strength, but you can't measure heart" is a scouting proverb. Pro sports teams assess intangibles like grit, discipline, and processing ability in interviews, tests, and reference checks.  High profile busts often lack these traits, while exceptional players rate highly on them. These intangibles, which cannot be directly measured, influence future performance and are critical to evaluate.

Our qualitative assessment assesses "intangibles" across the firm, investment philosophy, process, people, and portfolio.  We interview key personnel, check references, and seek to answer questions like:

  • What are their core investment beliefs?
  • How do they create an investment process around those beliefs?
  • How does theory translate into practice in their portfolio?
  • How do they handle wins and losses?
  • How do they work as a team?
  • Do they prioritize generating investments returns for their clients or profits for their pocket?   

We use a defined rubric to answer these questions.  Our structured approach creates a shared framework and common vocabulary to facilitate collaboration and improve judgement. 

Speed records don't predict game performance. Past returns don't predict future results. Our due diligence digs deeper than performance metrics alone. We understand why it happened, then combine understanding with a structured qualitative assessment of 'intangibles' to gauge future performance expectations.  

Operational Due Diligence: Evaluating "off the field" performance.

Pro sport teams, enamored with "on field" talent, have ignored "off the field" red flags such as arrests, criminal charges, and repeated failed drug tests in college.  These off-field behaviors have cut short promising professional careers, costing teams millions of dollars.

Investors fall for the same trap.  In the biggest financial fraud in history, consistent returns regardless of market conditions lured billions of investor dollars.  Meanwhile, massive “non-investment”, or “off the field” red flags existed.  No independent oversight of client assets as the investment manager also acted as custodian.  Counterparties couldn't verify trades because they didn't exist. An obscure one-man shop for an auditor.  The Operational Due Diligence review is an assessment of the “non-investment” or “off the field” performance focused on identifying these red flags.

Our entire roster gets an Operational Due Diligence review. Here's the key. It's done by a different person, independent of the investment due diligence.  They have a veto.  We may love the investment talent but if there's red flags in our "off the field" assessment we walk away.

The contract

Pro sports teams negotiate player contracts to get the best deal. We are no different and negotiate contract terms such as fees, investment minimums, and capacity. As fiduciaries, our focus is to secure favorable terms for our clients.  We do not accept placement fees, platform fees, or distribution fees and avoid conflicts of interest.

Ongoing Monitoring

Pro rosters aren't “set it and forget it”.  Teams constantly evaluate performance, make trades, and cut underperformers. Same with our investment manager roster. It’s subject to continuous monitoring, regular performance reviews, and we take decisive action when needed. A spot on our roster must be earned every day, just like in the pro’s.

The key ideas in 5 bullet points

  • We scout the entire industry to build an elite roster to access talented investors regardless of firm.
  • We maintain a deliberately focused, curated roster of investment managers to enable deep research and close monitoring of each strategy.
  • Our Investment Due Diligence combines an assessment of quantitative "measurables" with qualitative "intangibles" to assess future potential.
  • Independent Operational Due Diligence oversight with veto power identifies “off the field” red flags that could derail an otherwise attractive investment.
  • Continuous monitoring means every manager must earn their roster spot daily.

Scott Lavelle is Managing Director, Head of Manager Research and Investment Product Management at PNC Bank.

The views expressed are solely those of the author in their personal capacity and do not constitute investment advice or an offer to buy or sell any financial instrument.

The views expressed by the author do not necessarily reflect the views of Institutional Investor.

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