Due Diligence is the Bedrock of a Solid Investment Portfolio

That’s
why
investors need
to
be
able
to
respond
to
the
unique
combination
of
increased
funds,
the
exponential
rise
of
available
data,
and
continuously
shifting
investor
demands.
The
way
to
do
this?
Enhanced
financial
due
diligence
and
best-in-class
manager
research.

What
is
Financial
Due
Diligence?

Financial
due
diligence
(or
investment
due
diligence)
refers
to
the
process
of
investigation
and
analysis
conducted
before
capital
is
allocated.

During
these
due
diligence
checks,
investors
will
assess
the
different
aspects
of
a
fund
to
identify
factors
that
might
impact
whether
an
investor
would
like
to
invest,
such
as
potential
risks,
opportunities,
or
ESG
considerations.

Why
is
Financial
Due
Diligence
Important?

Due
diligence
checks
are
a
vital
part
of
the
investment
process.

Depending
on
where
you
are
based
in
the
world,
there
may
be
regulatory
requirements
you
need
to
satisfy
during
the
investment
process.
Failure
to
comply
could
result
in
a
fine
or
disciplinary
action.
For
example,
the
European
Union’s
Sustainable
Finance
Disclosure
Regulation
(SFDR)
requires
financial
market
participants
to
disclose
how
sustainability
risks
are
considered
throughout
the
investment
process,
so
good
due
diligence
is
a
key
requirement.
Additionally,
many
jurisdictions
have
strict
Know
Your
Client
(KYC)
rules
as
part
of
their
due
diligence
process.

There
is
no
sure-fire
method
for
determining
success,
but
identifying
and
mitigating
potential
risks
through
due
diligence
checks
is
one
of
the
most
effective
strategies.

Going
beyond
financial
statements,
legal
documents,
and
market
trends,
a
comprehensive
due
diligence
workflow
can
uncover
red
flags
like
liquidity
mismatches,
environmental
concerns,
or
style
drift.
By
unearthing
these
issues
early,
investors
can
avoid
unintended
consequences
that
could
lead
to
significant
losses.

Financial
advisers
have
a
fiduciary
responsibility
to
act
in
the
best
interests
of
their
clients.
Through
robust
investment
due
diligence
strategies,
investors
can
identify
funds
that
could
be
damaging
to
a
client.
For
example,
funds
and
companies
that
operate
in
a
particularly
volatile
or
controversial
industry,
use
an
unethical
supply
chain,
or
are
embroiled
in
legal
or
high-profile
scandals
all
have
the
potential
to
have
negative
repercussions
on
an
investor.

Again,
when
done
early
and
successfully,
these
due
diligence
checks
help
mitigate
risks,
but
even
more
importantly,
by
providing
a
360°
overview
of
a
fund,
advisers
can
empower
their
clients
to
make
informed
decisions
about
how
their
capital
is
allocated
and
build
trust
with
their
clients.

Finally,
financial
due
diligence
allows
advisers
to
ensure
their
clients’
portfolios
and
philosophies
are
aligned.
For
example,
as
investors
increasingly
seek
to
tackle
the
effects
of
climate
change
through
their
investment
portfolios
(with
more
than

54%
of
individual
investors
planning
to
increase
their
sustainable
investments
in
the
coming
year) asset
managers
must
analyse
funds’
credentials
to
spot
potential
conflicts
or
greenwashing.

What
Does
Good
Due
Diligence
Involve?

A
cornerstone
of
the
due
diligence
process
is
effective
manager
research.
When
assessing
a
fund,
manager
research
plays
a
crucial
role
in
understanding
the
skill,
experience,
and
capabilities
of
the
team
managing
those
assets,
and
understanding
their
investment
philosophy
and
processes
alongside
their
approach
to
risk
management
and
mitigation.

To
conduct
impactful
manager
research
that
aids
the
due
diligence
process,
analysts
need
access
to
high-quality
and
transparent
data.
This
data
could
be
a
mixture
of
qualitative
indicators,
such
as
the
three
Morningstar
Pillars
of

People,
Process,
and
Parent,
or
quantitative
measures
like
performance
and
price
(but
remember,
past
performance
is
not
predictive
of
future
results).

When
it
comes
to
ESG
considerations,
funds
that
disclose
climate-related
risks
and
opportunities
in
line
with
the

recommendations
set
out
by
the
Taskforce
on
Climate-Related
Financial
Disclosures
(TCFD)
will
provide
investors
with
greater
transparency.

The
manager
research
and
due
diligence
processes
are
complex
and
sophisticated,
but
any
analyst
worth
their
salt
needs
to
be
able
to
distil
this
information
clearly
and
concisely.

That’s
why
a
good
due
diligence
process
will
end
with
easy-to-follow
reporting,
pulling
together
all
the
data
and
research
carried
out
on
the
various
investment
components,
from
risks
and
opportunities
to
ESG
factors.
For
investors,
these
reports
should
leave
little
room
for
doubt
or
uncertainty,
allowing
them
to
make
a
fully
informed
decision
about
how
their
capital
should
be
allocated.

How
Morningstar
Supports
These
Processes

It’s
no
secret
advisers
and
investors
have
a
lot
on
their
plate
right
now –
from
keeping
up
with
the
latest
regulations
to
sourcing
rigorous
and
up-to-date
data
all
while
building
a
robust
portfolio
that
maximises
returns.

That’s
where
Morningstar
comes
in.
In
our

Guide
to
Manager
Research,
we’ve
compiled
our
latest
insights
and
methodologies
–
including
our
proprietary
ratings
system
–
to
help
relieve
some
of
the
pressure
on
advisers
and
investors.
Download
your
free
copy
today.

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