I’m working with the due diligence department of a major investment firm that wants to use my fixed income attribution model to screen bond managers for consideration into their product platform, as well as for performing ongoing due diligence and monitoring of their existing managers. They like the model’s robust analytics and drill down capabilities along with its minimum data requirements. They expect to implement the model at the sector level, since it’s unnecessary to get issue level data to perform the analysis. So, they began contacting their existing managers, asking only for the characteristics of each sector: coupon, price, duration, weighting and return. To their surprise (and to mine) they were denied this data from one of the largest bond managers around, citing difficulties in getting the data at first, and then switching their story to the potential legal problems with disclosing this data, since this information is not provided to every investor in their fund. They went back to the bond manager, clarifying that they would not be violating any rules in distributing this data, since the SEC rules only apply to individual bonds and not to the total portfolio or to the major bond sectors. For example, which investor would be harmed because the manager had noted in a report that the average coupon of the corporate sector was 3.5%? Seems rather silly, no? This appears to be more of an unwillingness to provide the data, rather than an inability to do so.
So, let’s consider this in the broader context of the legal concept of “informed consent” which requires providing potential investors with all the information they need to make the best decision that is in their own best interests. And how can an investor do this when managers are unwilling to provide general information about the major factors and parameters of their funds? I’m told that one would be hard pressed to get returns by sector from equity managers, so that it’s not simply the bond managers who are so seemingly recalcitrant. In a post-Madoff age of increased disclosure and due diligence, it seems that fund managers should be required to disclose the major characteristics of their fund so that investors can perform their own analysis and see whether the managers’ claims of the sources of risk and return are justified. It’s not enough to accept a manager’s simple attribution analysis as adequate due diligence into the investment process. Hopefully we have learned this from the Madoff scandal, and hopefully the fund managers will recognize their responsibility to provide greater transparency into their investment process – starting with providing simple data summaries needed for due diligence staff to corroborate the managers’ claims. This could be a “win-win” for everyone, but right now it’s just a dead end.