Quant screening: 3 questions for investment managers

EVALUATING investment managers is a challenging endeavour. Why else would asset owners expend so much time and resources, often with the aid of consultants, to conduct manager searches? Proper manager selection and evaluation requires thorough due diligence, but a relatively simple filter can serve as a helpful initial screen of potential investment managers.

There are three basic questions that asset owners should ask of any quantitative manager, before initiating their due diligence process with that manager. If a manager does not provide adequate responses, they may not merit further consideration. Though our focus is quantitative managers, the same questions also work for fundamental managers, especially in regard to the quantitative screens or signals they use in their investment processes.

1. What are the drivers of your investment process?

Investment managers should be able to explain what factors they consider most important to their investment decision-making, and provide some conceptual justification for them. For example, their equity factors ought to be economically intuitive and understandable, rather than opaque or synthetic. As a case in point, consider the definition of the Value factor. A single understandable metric like price-to-book (PB) has advantages over hybrids such as a “Value” factor comprised of some combination of price-to-book and price-to-earnings (PE).