Investment Products, Vehicles, and Manager Selection
Core concepts
Candidates must compare vehicles: separately managed accounts, mutual funds, ETFs, closed-end funds, and limited partnerships. Differences include liquidity, transparency, fee structures, tax efficiency, and access. ETFs trade intraday and can be tax-efficient; mutual funds price at net asset value once daily; closed-end funds can trade at premiums or discounts to NAV.
Manager selection is a structured process: define the mandate, screen the universe, conduct qualitative and quantitative due diligence, and monitor. Quantitative review covers returns, risk-adjusted metrics, attribution, and style consistency. Qualitative review covers team stability, process discipline, capacity, and fee alignment. Past performance is a weak predictor, so process and people carry more weight. Fee structures - asset-based, performance-based, and hurdle rates - affect alignment.
Traps
- Chasing recent top-quartile performance without checking style drift or survivorship bias.
- Ignoring the tax and cost differences between vehicle types.
- Confusing a closed-end fund's market price with its NAV.
- Overlooking capacity constraints in concentrated strategies.
Worked example
A fund's five-year return ranks in the top decile, but attribution shows the gain came from a sector bet outside its stated mandate. The process is inconsistent with the mandate, so the manager fails due diligence despite strong numbers.
Rule of thumb: evaluate the process that produced the returns, not the returns alone, and always compare vehicles on an after-tax, after-fee basis.