How Can Fund Selectors Really Carry Out Due Diligence?

Do you ask all the right questions in the right way? Are they framed in a clear concise and unambiguous way? Are they complete and up-to-date? Are there things missing that you need to know about?

Or, following a meeting with a fund manager, do you ever wonder on reflection whether you received an answer to the question you actually asked?

If you do, then the chances are that you are not alone. Despite many firms having existing due diligence processes and close relationships with the fund managers, they recognise the need to significantly improve the levels of due diligence they perform.

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Most firms have established processes for undertaking due diligence on either funds they wish to include in their 'house lists', or funds they are revisiting that are already in use by their clients.

They have established close relationships with these fund managers, which involves both meeting them face-to-face and issuing due diligence questionnaires or requests for proposal (RFPs).

Firms may rely on the information the fund manager provides as standard, rather than answering a specific set of standard due diligence questions.

This makes it almost impossible to undertake a thorough like-for-like comparison between funds, as the fund manager will have provided information that shows their fund in the best light. This can also be true when meeting the manager, who may want to emphasise the strengths of their fund - often without immediate realisation by the recipient that this is what is happening.

There is a growing realisation that complete and thorough due diligence is needed, partially driven by MiFID II and the regulator, but also by internal compliance teams who see data gaps, inconsistent data collection and ambiguous questioning.

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Meanwhile, fund managers end up complying with their client requests by answering the same questions phrased slightly differently within bespoke questionnaires, leading to a delay in submitting replies, with much resource and effort used to complete such paperwork.

Further, how does the firm know that it has asked all the right questions in the right way to arrive at the right assessment of the fund?

Essentially, I believe bespoke due diligence questionnaires are innefficient for several reasons. They are difficult to use when undertaking like-for-like comparisons, they are open to interpretation of general questions and they are time consuming when completing RFPs.

They are also resource-intensive for fund providers, causing delays for clients in receiving their information, yet are also repetitive, with bespoke questionnaires asking the same questions slightly differently.

This is without mentioning the fact fund manager are required to keep information up-to-date; information updates are generally infrequent and may be undertaken every six months or every year.