Operational Due Diligence, US Equity
Engagement at a glance
|Client Country/Type:||Dutch Pension Fund|
|Asset Class, geography:||US Value Equity, US Growth Equity|
|Mandate Size:||USD 100 million across two mandates|
|Structure:||Pooled vehicles (UCITS)|
|Service Provided:||Operational Due Diligence||Objective:||Pre-investment ODD review of four managers|
The investor, a Dutch corporate pension scheme, was seeking outside support to review the operating environments of four finalist managers for two US equity mandates. The client had historically performed site visits as part of its fund selection process but sought specialist support during the COVID-19 pandemic.
The objective was to conduct a robust assessment of four prospective US equity managers (two Value, two Growth). While the investor had an existing framework to consider operational risk, it was relatively high-level and lacked granularity in some areas.
- Working as an extension of the investor’s team: bfinance’s Operational Risk Solutions (ORS) group developed a client-customised due diligence questionnaire (DDQ), ensuring that manager information was captured in a consistent manner. The investor stayed highly involved through the process, including participating in videoconference assessments with the managers, supporting good governance and knowledge transfer.
- Producing in-depth analysis: Detailed, structured assessments were executed for each manager. The ORS team analysed each manager’s DDQ response as well as a range of vehicle-specific and manager-specific documentation (fund prospectus and financial statements, compliance manual, trade error policy, valuation policy, business continuity plan, cyber security policy, cyber incident response plan, internal controls report et cetera). Videoconference interviews were held with key personnel at each firm such as the heads of Operations, Compliance, Technology, Information Security, Legal, Trading, Risk, and Internal Audit.
- Identifying operational weaknesses: One of the managers–a firm with nearly $10 billion in AuM—was assigned a ‘Remediate’ rating with the team noting issues with the firm’s pre-trade compliance and cyber security controls. This manager lacked: independent checking on coding of fund/account restrictions/guidelines in its order management system; third-party penetration testing (ethical hacking), multi-factor authentication for remote network access; encryption on removeable devices.
- Encouraging manager improvement. The team takes an activist approach; all managers agreed to implement recommended revisions and bfinance tracked their progress in doing so. Although the investor did not proceed with the manager rated ‘Remediate’, this was primarily based on investment reasons: the manager has worked to remedy the issues that were identified.