Institutional investors have access to such a wide variety of investments that it can be a struggle to find the time to properly vet and evaluate all the options, especially on the private markets side. No matter which asset class or strategy you are considering, it’s important to know the right questions to ask that will help guide you in deciding where you would want to spend more time performing deeper levels of analysis.
Tweaking the Asset Allocation Mix
New asset classes and vehicles changes the dynamics of your portfolio, so running scenarios for your plan’s risk/return profile is key to making solid decisions.
Monte Carlo simulation is an important aspect of your portfolio construction process. In this example, you can see the development of the portfolio and the various scenarios that could occur over the next ten years using the parameters you have selected.
Questions to consider:
- Would passive investing make sense for certain situations or asset classes?
- What about liquidity parameters – how long are you willing to have your money tied up? That could affect your allocations to private markets or certain hedge funds.
- What are your peers doing? Are similar investors increasing or reducing allocations to or from certain asset classes?
Researching Managers
After the investment committee has decided to invest in a new vehicle or asset class, you start researching on a broader level and then narrowing down from there. In the end you will have shortlist of managers who meet your criteria.
Complex Investments
Viewing the activity of your peers can help you better understand a product’s position in the market.
Questions to consider:
- Which universes are in favor or not? Even if a universe if experiencing net outflows, moving could still be moving within the universe.
- How are your peers researching and reviewing a product you have your eye on? Viewing this activity can help you to better understand this product’s market position.
- What characteristics are being used to evaluate specific products and universes?
Comparing Investment Options
Gain context around an asset manager’s performance and understand what’s going on behind the headline numbers. You should be able to truly differentiate among managers across asset classes.
By looking at a manager’s holdings versus their peer group, you can see which stock holdings set them apart from the group.
Questions to consider:
- Is this manager staying true to their investment philosophy and/or style?
- How does this manager compare against its benchmark and peer group? Do they have high conviction and how has that impacted performance? How have they added value?
- How well does this strategy fit in with your existing portfolio?
Ongoing Monitoring and Replacement
Keep an eye out for red flags even after you have selected a manager for an allocation – and when considering replacement, make sure you actually do have a better option. Even an underperforming manager may be doing better than their peer group.
Risk regression can show you where you have sensitivities that you might not even know about. This helps you get more insight into your portfolio as far as exposures and empowers you to go ask more questions of your managers.
Questions to consider:
- Are manager capacity constraints a potential issue?
- Has there been turnover on the portfolio manager team?
- Do you have exposures or sensitivities you may not be aware of from a risk perspective?
Download eVestment’s latest whitepaper, “Evaluating Your Portfolio” to learn more about the questions you could be asking in order to get context and a frame of reference around your portfolio analysis.
Article by Andrea Teh, eVestment
