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3 Due Diligence Questions from an RIA

4 minute read

In person meetings between asset managers and investors are the most engaging and energizing parts of the due diligence process. That’s why we loved hearing that an RIA we know uses these face-to-face interactions to cut right to the chase about what is important to their firm when partnering with a mutual fund company.


The RIA asks 3 key questions:

1. What makes your team different and unique?

2. What makes your strategy different and unique?

3. What is a mistake you have made while managing the strategy and what have you learned from it?

Here are our responses:

  1. Our team has been together for a long time. We know that most mutual fund companies say something to this effect. Some firms like to add the collective years worked in the industry and quote that number… it’s usually something crazy like 100 years. At R Squared, our international equity team has members that have worked together going back 20+ years to our days at Julius Baer / Artio. We believe there is something to be said for people who stand by each other, invest through good times and bad, and continue to believe in each other and their process.


  1. That leads us to our strategy and our process. Similarly, our international equity strategy is one we’ve used for over 22 years. It’s unique in that since day one, it has utilized both top-down macro and bottom-up fundamental research. In recent years, we all know that macro has had a more marked impact on portfolios than it has in years past. The RSQ investment process is time-tested and yet, we continue to look for ways we can add structure, oversight, focus, and risk management to that process to keep improving at the margin.


  1. We make plenty of mistakes; yet we always strive to learn from those mistakes. Successful management of an international stock portfolio requires diligent risk management. Some risks are fairly obvious, e.g. how the portfolio is distributed among geographic, currency and sector risk buckets. At times in the past, our performance suffered when a less obvious risk factor came into play. Portfolio allocation between growth stocks and value stocks would be one example. Also, at times, stocks with positive momentum lead the market, followed eventually by a violent reversal as mass profit taking afflicts the positive momentum stocks. We once had a period of underperformance when companies in developed markets that exported to the growing Chinese economy did much better than the Chinese stocks we owned. It is also key to think about what we call “sub-sector risk,” particularly in some of the larger more diverse sectors. Decompose the energy sector into upstream, downstream, mid-stream pipelines, and oil service companies. Within health care, pharmaceutical, medical device, bio-tech, generic pharma, and hospital chains may lead or lag the sector. Identifying which subsectors benefit from tailwinds or are fighting structural headwinds can be very helpful to performance.

    Perhaps our worst mistake was in March of 2009. Debt market conditions were very challenging in the 2008 crisis atmosphere. Entering 2009, we had a portfolio filled with companies with strong balance sheets. Junk bonds started rallying early in 2009, and then central banks aggressively loosened policy settings in March. Suddenly, the companies with the very worst balance sheets started doubling and tripling in value and we didn’t own them. In a sense, their stocks represented a call option on future solvency. We had to radically reposition our portfolio to include companies with lower credit ratings. We had a very poor second quarter of 2009 but then did better in the second half of that year. All due to initially underestimating the importance of our allocations to companies with differing credit ratings.

RIAs, what are the questions you ask your potential asset managers? Mutual funds, what are the toughest questions you’ve been asked? Share your comments below!


RSQ Quarterly Market Commentary Download Now

As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.   

Richard Pell R Squared Capital ManagementFROM THE DESK OF RICHARD PELL

Richard Pell is CEO and Portfolio Manager at R Squared Capital Management.

Richard co-founded R Squared Capital Management in May of 2013. Prior to that, he was Chief Executive Officer and Chief Investment Officer of Artio Global Management LLC, a position he held since 1995 when the firm was part of the Julius Baer Group. Richard also served on the Board of Directors at Artio.

To read Richard's full bio or other RSQ team members, click here.  

Posted by Richard Pell on Dec 6, 2017 1:19:44 PM

Topics: From the Desk of Richard Pell, Due Diligence


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