Search, Selection and Monitoring

The search for “best-in-class” investment managers and products.

The goal of active manager selection is to identify managers with consistent investment processes that can demonstrate value added risk-adjusted performance over time. The investment manager search and selection process is conducted by Avantax Wealth Management’s Portfolio Management Group (PMG) in conjunction with other Avantax resources. The evaluation process can be separated into two parts, and the relative importance in the decision-making process is weighted as follows:

  1. Qualitative evaluation (60 percent) — evaluation of the investment based on people, philosophy, process and implementation (why the investment performs the way it does).
  2. Quantitative evaluation (40 percent) — evaluation of the investment based on numerical, statistical or measurable attributes (how the investment performed).

The PMG begins by working from the universe of mutual funds available, which includes load-waived funds, no-load funds and institutional-class funds. The PMG seeks funds that have expense ratios in the bottom half of their appropriate peer groups and prefers that a mutual fund has a three-year performance track record with the current portfolio manager. Quantitative evaluation begins with a list of all the funds representing a specific asset class or sub-asset class drawn from the available universe. The PMG will take this list of funds and initially scrub it based on a number of key analytics, such as active share, manager tenure, information ratio, expense ratios, fund size, various performance metrics and other crucial attributes. This type of review is used as an indicator of the probability that the manager’s returns were based on a consistent skillful investment process, as opposed to being based merely on luck. At this point, additional work is done to further reduce the list of potential candidates. This analysis examines the diversification benefits the fund brings to the portfolio as a whole. Operational and logistical criteria are also considered to ensure that funds selected for additional review represent both prudent and practical investment options for use within the IMS Select Portfolios.

Qualitative evaluation begins by conducting conference calls with the investment management team of each of the funds that have passed the quantitative screening process previously mentioned. The calls serve to gain precise understanding of the fund’s investment process, specific risk controls and sources of excess returns. The PMG makes a special effort to understand what differentiates a manager from others in its peer group and how the fund will react in various market environments and/ or conditions. The underlying focus within this process is to identify exceptional managers who can offer unique investing insights. A clearly defined investment process that can be evaluated on an ongoing basis is also crucial. This ensures the ability to regularly determine consistency in a manager’s ability/skill as well as an investment process' unique characteristics. Those managers passing this segment of the screen will make the short-finalist list, at which time members of the PMG will conduct an on-site visit to the manager’s office. While there, members of the PMG team will verify information shared on the initial conference call as well as assess the fund’s transparency, accessibility to key decision makers, and the stability and reputation of the investment firm.

The final candidates’ quantitative and qualitative evaluations are presented to the Investment Committee for deliberation prior to moving on to a vote for inclusion in the IMS Select Portfolios.


Investment Manager Monitoring and Review

Once a fund is included in the IMS Select Portfolios, the process of evaluating a manager does not stop. One of the primary goals of ongoing monitoring is to identify early warning signs of adverse changes in existing managers’ strategies, organizations or processes. Periodically, the PMG performs robust quantitative analysis of each fund based on many of the same initial criteria used in the fund’s onboarding process, namely various numerical, statistical and measurable attributes. This consistent approach helps ensure that selected funds are adhering to Avantax’s expectations regarding their stated disciplines.

The quantitative review process provides information that will focus the qualitative review efforts. The PMG evaluates each fund by studying the fund manager’s written commentary and keeping in close contact with the management of each fund. As such, conference calls in which the PMG seeks to understand what is driving the performance of a fund are conducted on a regular basis.

While the PMG conducts the majority of the functions mentioned above, it is supported by a number of additional resources. The PMG draws upon the expertise of the Avantax Investment Committee, which includes members from Avantax Wealth Management’s executive leadership team. Each member of the committee provides insight on different aspects of the due diligence process by drawing on his or her work responsibilities and professional experiences to help in making decisions for the IMS Select Portfolios.

The Portfolio Management Group

The Portfolio Management Group (PMG) is tasked with finding “best-in-class” investment managers and products for use across the IMS Select Portfolios strategies as well as other IMS programs.