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Alpha Due Diligence

What We Look For

Boutique money managers that are known for their entrepreneurial, performance-driven cultures where creativity, intellectual rigor and independent decision-making are valued and rewarded. Boutiques are private companies, owned and operated by the investment professionals who founded them. Ownership is often available to non-founders as well, a powerful incentive that helps boutiques attract and retain the best talent in the industry. Members of the investment team commit personal money to the funds they manage, providing further motivation to out-perform and giving clients extra confidence in their ability and commitment. Today, boutiques are the speedboats of the money management world as proven by their consistent out-performance of their much larger brethren. Their singular focus on a small number of mandates along with their lean organizational structures and manageable asset levels allow them to respond quickly to changing market conditions and new opportunities.

 

Manager Identification

Relationship Network – The NS Capital Investment Committee (NSCIC) has a large network of industry contacts that it utilizes to “discover” talented asset managers before they become well known. This network includes money managers that the committee members have come to know over their careers, referrals from industry peers and suggestions from other investment management organizations. These referrals often allow us to find managers that may not yet have found their way into the industry mainstream.

Conference Circuit – Participating as both speakers and attendees in most of the industry’s leading investment conferences broadens NSCIC’s exposure to money managers who meet NS Capital’s criteria and embrace our philosophy of investment management.

 

Manager Selection

  • Step 1: Request quantitative data. An NSCIC member contacts the manager to introduce NS Capital and educate the firm about our investment philosophy and platform, and to determine the manager’s interest in participating. If the response is positive, NSCIC makes the following document requests: • The firm’s due diligence questionnaire • The firm’s complete form ADV • Performance history of the applicable investment strategy • Performance disclosures by the firm’s auditors • All regulatory documents including state and federal audits • The firm’s institutional marketing presentation • The firm’s recent newsletters and portfolio commentaries
     

  • Step 2: Search the Internet for third-party information on the firm and its key employees. NSCIC also searches the Security & Exchange Commission’s website for any available data.
     

  • Step 3: A review of all the relevant information and data by NSCIC to determine if the firm meets the quantitative bar before continuing the due diligence process.
     

  • Step 4: Conduct a formal due diligence call to begin the process of obtaining qualitative information. The critical topics covered during the call include the firm’s: evolution, organizational structure, hiring practices, growth strategy, research approach and capabilities, portfolio methodology, and compliance issues. NSCIC will then review the information to make the determination as to whether or not the firm remains a viable candidate and to identify any “red flags” that need further clarification prior to the on-site due diligence meeting.
     

  • Step 5: Send the NSCIC analyst team to the investment manager’s headquarters to conduct an extensive on-site due diligence visit. The analyst team will meet face-to-face with the Principals, Chief Investment Officer, Portfolio Manager, Research Analysts and other key employees to review the following: • Firm overview • Portfolio management philosophy, process and skill-set • Buy and sell disciplines • Portfolio construction and risk management • Trading and operations • Information technology infrastructure • Business continuity issues • Regulatory issues
     

  • Step 6: Make the final decision. The analysts will prepare a formal recommendation to the Investment Committee specifying whether or not the investment manager’s strategy should be offered a position in the Alpha Ring.
     

  • Step 7: Conduct a meeting at the investment manager’s headquarters between the firm’s principals and NS Capital’s Senior Managing Partner to define the business relationship and expectations and to determine the appropriate fee for the money management services to be provided.

 

Monitoring

The monitoring of NS Capital’s managers by the NSCIC is a critical component of the long-term success of the NS Capital Portfolios. The goal is not just to evaluate past performance, but also to continually monitor all the key factors that determine the probability of the manager’s future success. It is through this monitoring process that NSCIC is able to make the ongoing decisions that call for manager retention or, if warranted, replacement. Like most industries, the investment management business is dynamic, with portfolio managers changing jobs, firms merging and new investment ideas developing. The NSCIC continually monitors changes in manager strategy, process, resources and results. At the same time, we recognize and accept the important realities of successful long-term investing; that even investment managers with strong skills can experience periods of weak performance due to market or economic cycles that favor other strategies. The reality of manager diversification is that not all investment strategies and managers will perform alike at the same time, but over time, if the managers are evaluated thoughtfully and thoroughly, the strengths of a well-constructed portfolio will be apparent.
 

  • Step 1: Five-Factor Review • Strategy - Review each manager’s investment strategy from numerous perspectives to assess the likelihood of continued superior investment returns and • to ensure that changes in the strategy do not affect the manager’s role within the context of the total portfolio • Process - Review the process each manager utilizes to ensure implementation remains consistent, cohesive and efficient • Resources - Evaluate each manager’s organizational structure for depth and stability • Performance - Review the record of each manager for both relative and absolute total returns • Operating Costs - Regularly examine all costs involved in implementing an investment strategy, including fees and trading costs, because the surest way to improve returns is to control costs
     

  • Step 2: Ongoing Evaluation The NSCIC conducts a systematic review of the investment managers, which includes periodic conference calls, quarterly evaluations of investment performance and fund structure, annual on-site meetings and comprehensive three-year evaluations.
     

  • Step 3: Utilize a “Watch Status” “Watch Status” is an intermediate state of heightened oversight, triggered by any change that could jeopardize an investment manager’s ability to fulfill an assigned role. The NSCIC will put a manager on “Watch Status” if they produce disappointing performance results, change investment strategy or process without warning or experience significant personnel departures.