What qualitative criteria matter most in manager due diligence?

Question

AcadiFi · Accepted Answer

The qualitative framework is often called the '4 Ps': People, Philosophy, Process, and Portfolio. Some frameworks add Performance and Price (5Ps or 6Ps).

People: team experience, tenure, turnover history, ownership structure, succession planning, key-person risk, depth of research bench. Red flags: high turnover, dominant single PM without succession, star-manager risk.

Philosophy: the firm's core investment beliefs and whether they are clearly articulated, internally consistent, and plausibly generate the claimed alpha. Example: 'quality-at-reasonable-price' requires defined quality metrics and valuation discipline — if vague, the philosophy won't hold up under pressure.

Process: the repeatable steps from idea generation → research → portfolio construction → risk management → trading. Check: is it documented? Does portfolio actually reflect the stated process? How are dissenting views handled?

Portfolio: top-10 holdings, sector/region exposures, concentration (% in top 10), turnover rate, factor exposures. Does it align with style claim?

Example: Foxglen Capital claims deep-value small-cap. Qualitative review reveals: (a) 3 senior PMs average 14 years together (people: OK), (b) clear Graham-Dodd philosophy (philosophy: OK), (c) documented 6-step process (process: OK), (d) BUT portfolio has 35% in mid-caps and turnover 90% (portfolio: RED FLAG — style drift).

For the exam, articulate WHY each qualitative criterion matters (repeatability of performance) and recognize when stated style diverges from actual portfolio.

What qualitative criteria matter most in manager due diligence?

Master Level III with our CFA Course

Related Questions

Practice Questions