How to get the most out of that BDM visit – an Insider’s View

The best interest test within FoFA carries an enforceable duty of care when it comes to making investment product selections on behalf of your client. By extension, it therefore pays to understand – not just from a compliance perspective – how to best approach meetings with fund managers and their representatives in order to maximise the outcome on behalf of your practice, your professional duty and your clients.

Alex Wise from specialist fund manager Select Asset Management begins this first of a three part CPD mini-series with an insider’s account of making the most of your BDM visit.

Manager meetings can be daunting.  The range of subject matter can be complex, and quantitative statistics difficult to, well, quantify.  Many advisers are also meeting with business development managers (BDMs) who have no involvement in the portfolio management of the fund in question.  The key for meeting preparation is the right mindset: “How am I going to get the best out of this meeting”.

Firstly, what’s going on at such meetings? From the point of view of the BDM entering the meeting there are competing objectives of education and sales.  The BDM is looking to educate the audience about the fund manager and fund in question with an eye to making a sale (whether it is a new investment, increase to existing positions or persuading you to keep your position in a certain fund).  Your job as the interviewer is to carry out or add to your existing knowledge of the fund manager; in essence carrying out due diligence.

The result of the due diligence effectively means an adviser makes a decision whether to allow the fund manager the privilege of managing his or her client’s money.

In order to make that important decision the adviser should be looking at some very simple but vital considerations:

• Can I make a judgement regarding the manager’s honesty?
• Do I think the Fund Manager’s organisation is competent?
• Does the investment strategy have the potential to make money going forward?

Preparation

Prior to the meeting an adviser should receive information regarding the fund.  This could include the latest monthly report, possibly a presentation, an FSC or AIMA Due Diligence Questionnaire (DDQ)  and the Product Disclosure Statement (PDS).  Take more than a cursory glance at these ahead of the meeting, as they represent a wealth of information about the fund manager in question.

The PDS carries (or should carry) functional information such as “when can I subscribe or redeem” and “what are the fees”.  The rest of the PDS is largely boiler plate language and it is difficult to learn about the Fund’s investment strategy from this document alone.   Typically you might also expect wide-ranging language regarding the risks of the fund.  This language is not really for education purposes more to protect the fund manager and issuer should things go wrong!

Fund performance in focus

In relation to the monthly report take a look at past performance.  Are there any periods where the fund has performed well or poorly?  If the fund has performed well in difficult market environments then the adviser should prepare questions on these areas.  Conversely if the fund has underperformed in bull markets this should be analysed too.

The Due Diligence Questionnaire is a very important document.  When reading the PDS an adviser should note down any questions – particularly in areas that are not easily understandable.

It’s also worth making time to carry out some basic desk research via the web.  The internet is a wealth of information and as a first port of call can often uncover some hidden gems of information.

Take the time to call industry peers to take an informal reference on a new manager, particularly if you can find someone who has invested with the manager previously.  Find out what their experience as an investor was like, aside from whether the manager made or lost them money.

Once your preparation is done review your questions and notes with a colleague – perhaps they might have met the manager previously and may have some insights too.

The Meeting

A trait of human nature is the suppression of natural inquisitiveness primarily because we don’t want to appear ill-informed.  The research meeting is not the time to worry about asking the ‘dumb’ questions!  In fact, often what may seem to be a ‘dumb’ question is the best one to ask – and the hardest to answer.  Even seasoned advisers start with entry level questions and many rely on instinct as a guide throughout the process.

A good starting point is to ask the BDM to explain the investment strategy.  If you are confounded by buzz words and fund manager-speak don’t be afraid to ask “What does that really mean?”  There are some cases where the BDM doesn’t really understand what they are selling, particularly if it’s a complex strategy, for example a Cumulative Translation Adjustment (CTA).  If a BDM cannot explain a strategy to you with sufficient clarity then you are perfectly at liberty to ask for someone else who can explain the strategy.   Most institutional investors will meet directly with the portfolio manager (PM) with sufficient frequency.  Ask for a follow up meeting or call with the PM so that they can explain the strategy directly.

Ask about the manager’s investment philosophy and then ask about the investment approach.  Note details on the various stages of the investment process to assist future readers.  Ask for details on portfolio construction and risk management.  This process can be quite complex so the BDM will have to explain it with sufficient clarity.

It also helps to ask for examples, particularly if you are in deep technical conversation regarding, say, the risk management focus on the fund’s ‘sell’ criteria.  It is also very helpful to ask about the fund’s expected behaviour; this can of course be monitored.  When looking at risk management be sure to ask about whether this is independent from portfolio management.  The segregation of these duties is fundamental in any funds management business.

As you work through the list of questions prepared ahead of the meeting make additional notes about follow-up points.  Recap these at the end of the meeting to ensure the BDM knows exactly what your requirements are to move forward to the next stage.

It’s good to note why the fund was set up as this usually leads to a discussion about what ‘edge’ the fund brings and how the manager thinks about the market.

The Meeting Note

The meeting note is a crucial document for your risk management.  The note should be comprehensive enough to show the key points of the meeting yet succinct enough to be read by future users.  The Meeting Note should distil the meeting discussion right down to the key points of the discussion.  The Meeting Note is also a good forum to include text about why (or why not) this particular investment is in the best interest of clients.

The Meeting Note should also summarise the key facts from the meeting.  What is the Managers Funds under Management? How long has it managed money? Who are the PM’s for the fund?

The Meeting note should be differentiated from the Due Diligence Report which should include a call to action “Buy/Sell/Watch” and conclusions on why this investment is in the best interest of the client.

The meeting note should not allow the writer to sit on the fence – it should include information on what the author really thinks!

Once the meeting note is complete it can form part of your due diligence pack on a particular investment.

The Due Diligence Pack

The Due Diligence (DD) Report or Pack should include all information provided by the manager as well as the notes from any meetings held.  These packs are often presented to investment committees.

If you are writing a report about a fund in a relatively new or complex area you may like to insert a section describing the market/strategy so that the reader has enough background knowledge to properly consider the rest of the report.  Try to keep it as concise as possible. Try to not just cut-and-paste from a DDQ as manager prose can often be generic and unlikely to satisfy the best interest test.

Reflect on your notes on the investment process then focus on your opinion of the investment process.  Note what you think are the strengths and weaknesses?  Does it reflect the investment philosophy?  Does it exploit the manager’s edge?  Do you think it leads to any bias?

The DD Report should recap on the meeting notes (there may be multiple).  Some key areas to cover are performance, risk management, liquidity and structure.

Meeting with managers and conducting due diligence requires a significant investment of resources – particularly in a capacity constrained business. Many advisers use a consultant to assist them wade through the tasks.

Above all, however, an adviser should be confident the investment is in the best interest of her of his investors: do not be afraid to walk away from a manager on nothing other than gut feel.

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes.