Utilizing Highly Skilled Managers Is Critical
Sterling Capital Management's Advisory Solutions team employs a manager search and selection process that begins with idea generation.
Investment strategy ideas are generated through:
- Screening investment manager databases
- Face-to-face meetings with investment firm personnel
- Attending conferences
- Various investment-related publications
Factors used in the quarterly screen include:
- Assets under management
- Number of holdings
- Portfolio turnover
- Risk-adjusted statistics
- Historical alpha generation
- Manager tenure
- Capital gains exposure (mutual funds only)
- Active share (Active share measures the percentage of a portfolio that is different from the benchmark; in other words, it measures how actively managed a portfolio is vs. a benchmark)
The screen is intentionally broad in an effort to avoid eliminating potential investment candidates by using screening criteria that are too stringent.
After identifying investment strategy candidates, qualitative and quantitative due diligence begins. Components of the due diligence process include:
- Sourcing important information from investment databases such as Morningstar Direct®, EnvestnetPrima®, PerTrac® and Factset®.
- Investment manager questionnaire - All prospective managers must complete a comprehensive questionnaire. This questionnaire allows Advisory Solutions to gain access to information that is not readily available on investment databases.
- Face-to-face meetings and conference calls with investment managers - In order to obtain, evaluate, and question additional qualitative and quantitative information, Advisory Solutions conducts several meetings and discussions with portfolio management teams. Advisory Solutions had over 560 points of contact with approved and prospective investment managers in 2016.
Qualitative factors are just as important, if not more important, than past performance when determining whether or not a manager will produce outperformance in the future, as well as in making the distinction between skill and luck.