How Strong Diligence Builds Better Portfolios

Financial volatility and economic uncertainty require investors to be confident in their portfolio allocations.

Perhaps the late David Swensen, the chief investment officer for Yale University, put it best in his 2000 book Pioneering Portfolio Management:

“Investment success requires sticking with positions made uncomfortable by their variance with popular opinion. Casual commitments invite casual reversal, exposing portfolio managers to the damaging whipsaw of buying high and selling low. Only with the confidence created by a strong decision-making process can investors sell mania-induced excess and buy despair-driven value.”

To that end, AMG focuses on identifying best-of-breed investment managers through a rigorous set of quantitative and qualitative criteria, with the expectation that selected funds deliver strong returns versus their categories over multiple market cycles. Our methodology starts from the premise that trailing returns alone don’t predict future results, so thorough diligence must go deeper to identify managers who will be strong stewards over the long haul.

This means reviewing quantitative data far beyond trailing performance numbers: risk-adjusted returns, performance and risk in various market environments, tracking error and active share, factor exposures, and analysis of historical holdings and exposures all paint a more thorough picture of how a track record was generated.

Qualitative diligence is of equal importance: Whether a strategy can continue to do what it’s done in the past is a function of whether the team, business and investment philosophy all remain stable.

What does this look like in practice? AMG considers the business a particular investment strategy operates within, as this can lead to strong or poor investment results over the long run. Imagine a business facing a corporate merger or a significant turnover at the senior leadership level. Worrying about ongoing office politics might distract an investment team from their objective of selecting a good investment. Fully understanding what’s happening at a business level can help anticipate future challenges for an investment strategy.

AMG uses a disciplined, criteria-driven process to evaluate fund managers. Through deep diligence and a repeatable process, we aim to build the kind of conviction Swensen describes: the confidence to stick with managers through short-term underperformance and act decisively when a thesis changes.