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Posted by Brett Gustafson on Jul 6th, 2023

Portfolios with a Purpose – The Art of Due Diligence

Our vision at Purpose is to build meaningful relationships with advisors by playing a small part in overcoming everyday challenges in your practice. We have found through working with dozens of advisor practices, our team at Purpose can provide the most value through insights into our portfolios and our process. In a rather secluded industry, we aim to set the tone by being as transparent as possible about how our team builds and monitors multi-asset portfolios. With that transparency, advisors can leverage our work and insights for their practice, helping their decision-making process.  A better process helps improve outcomes which helps the end client.

The Art of Due Diligence

Fund manager due diligence is a vital step in the investment portfolio process. The best part about investing today is that the tools for the portfolio are more accessible than ever, but with that comes much more complexity. Thousands of investment solutions are available to investors, and it is safe to say that each manager is vying that they are better than the next one. Therefore, with that tidbit of information, the final determination of which solution makes it into your portfolio is up to you and your asset management team.

Beyond Performance

It is fair to assume that a large majority of investor due diligence relies on past performance analysis. Whether that is analyzing Sharpe ratios, downside participation, or a funds beta, for a portion of the process, this is valuable. It is beneficial to see how certain Funds/ETFs performed in particular market environments. However, relying solely on this data can lead to performance chasing.

It is pretty simple if you are analyzing solutions on performance, logically, you are going to purchase the best-performing fund. But the data tells us that would be a mistake. Looking at Canadian equity mutual funds with at least a 10-year history, if you bought a fund in the top decile 5 years ago, you only have a 12% chance of that fund being in the top decile today. Even more shocking is the magnitude of the percentile decline, with the average falling out of the top half of the category. When you are at the top, the goal is to remain there, but there is truly only one direction to go. The same goes for the funds at the bottom, in which 0% remained in the bottom decile over the subsequent five years. A few cracked the top decile after 5 years, but a majority showed modest improvement against their peers. A useful insight from this research is that funds in the lower half of peer rankings typically remain there.

5-Year Mutual Fund Peer Ranking Performance Canadian Equity

Simply put, past performance does not indicate future results. The data confirms that when selecting solutions for your portfolio – deeper due diligence is necessary. It is important to understand that you are not going to bat a thousand, but the good news is, your competitors won’t either. Selecting the best fund in each asset class of your portfolio for the next 5 years is like embarking on a culinary expedition without a recipe. It's a flavorful journey where you explore different ingredients, experiment with techniques, and rely on your taste buds to guide you. So, grab your apron, sharpen your chef's knife, and let's savor the art of due diligence.

Recipe for Success

It is important to the success of a portfolio to select managers that align with your portfolio goals. Implementing solutions through passive or active is one of the initial considerations. Our rule of thumb is the more efficient the market is, the more passive you can be with your allocation. For example, Emerging markets might warrant more of an active solution than an allocation to U.S. large-cap equities. That is not to say you shouldn’t be active in North America, it just means more work is needed to find the alpha in a haystack.

Once your asset allocation framework is established, the next step is to initiate the investment screening process. Initially starting with a comprehensive list of products with minimal constraints. The only constraint necessary in this part of the process should be the specific asset allocation category you are screening for. For instance, if you are searching for Canadian equity, that should be the only category selected.

When the asset universe has been established, the screening process becomes a little more selective. This is where various attributes of the products can come into play. Factors such as fee constraints, client cash flow needs, and portfolio yield optimization may guide the selection process. Liquidity also becomes a significant consideration if clients prefer to have more efficient access to their funds. You can screen products by Assets under management (AUM) to identify preferred funds within the category, but caution should be exercised to avoid herding bias. Another crucial criterion is the inception date, as most advisors prefer to evaluate a manager's performance over a full cycle or longer. Through this product refinement process, you will identify investments that best meet your parameters, ultimately leading to the construction of a well-optimized portfolio.

Now the fun part of the process can begin, analyzing the selective list to determine which solutions align with the goals of your portfolio. The process entails a thorough examination of several factors to evaluate the suitability of your portfolio as well as the risks associated with each mandate. These factors are both qualitative and quantitative from performance to philosophy, but most importantly how it fits in your overall portfolio. Making informed decisions and ensuring alignment with the desired investment objectives and risk appetite is vital to success.

The below “Five P’s” are the factors we believe are the most crucial.


As described in the “Beyond Performance” section, analyzing historical performance is not all-encompassing, but that does not mean that it should be ignored. When evaluating the performance of a product, the real question to ask yourself is “Why?”. If a product outperformed, why did it outperform? If it underperformed, why did it underperform?

Relative performance is crucial in evaluating the different strategies.

Relative performance can be measured against a benchmark or perhaps the short list of a basket of peers you have already unraveled.  A few critical metrics for comparison include Alpha, Active Share, and upside and downside capture ratios. These metrics should give a feel for the historical performance of the product.


“People” encompasses the overall firm as well as the management team responsible for operating the fund.

Exploring the historical background and evolution of the firm becomes crucial in comprehending its origin and developments.

The firm’s longevity and its underlying purpose are fundamental inquiries that can be discovered through examination.

There are a few areas of importance when it comes to the management team. Determining the experience of the portfolio managers, whether it being involved with the product you are analyzing or prior experiences. Additionally, the team’s composition in terms of member count and qualifications as well as departures and additions can be considered an area of interest.


Philosophy is limited from a quantitative perspective. Reading reports, commentaries, and data can only tell you so much about a fund from a philosophical viewpoint.  Learning the objectives of the fund is an appropriate starting point for philosophy, as this will lead to understanding the goals of the PM and how they hope to achieve them.

Deciphering what drives the fund from a factor perspective can lead to a better understanding of philosophy.

Is the fund a value-oriented product or growth-oriented? By analyzing the factor tilts, we can gain insights into the markets where the fund is expected to outperform or underperform. These questions can be answered through research, but the most accurate and comprehensive answers can be obtained directly from the portfolio manager in the next stage of the due diligence process.


The process allows the investor to gain a grasp on the buy-and-sell discipline of the fund. Determining how consistent the process has been through the existence of the fund is important. In specific scenarios, perhaps the portfolio manager has adjusted their process. Are there sizing limitations on company, sector, geographic, or cash exposures?

Assessing the funds' process against other competitors in the space can reveal if they are top-down managers or bottom-up managers.

Essentially that determines if they believe in fundamental deep economic research or do they ignore that to focus on individual corporations first. The goal here should be to determine whether they have some form of competitive advantage against other competitors or what makes them different than low-cost providers.

Portfolio Composition

Finally, the most crucial factor – determining if the composition of the product achieves the goals you set out to accomplish. This step will eliminate solutions based on the fact that their true exposures do not align with your goals for the overall portfolio.

Determining how the product fits into the portfolio and compliments other pieces of the pie is the challenge you are attempting to solve.

After analyzing all factors, the process will lead to a select few products that warrant a discussion with the portfolio manager. The prospect of meeting with a manager may be intimidating but portfolio managers are people too. And it is essential to understand who that manager is and what his/her philosophy is.  It is important to have a set of questions ready to go for the meeting. We have taken the liberty to design a due diligence checklist for advisors to have efficient meetings with portfolio managers. You may think you know the answers to some of the questions from your research process, but it is still good to hear the answer directly from the manager. Nothing gives you a better understanding of a management team’s philosophy and process than a good ol’ conversation.

Due Diligence in Practice

While we are attempting to encourage a structured due diligence process, we acknowledge that the ‘textbook due diligence process’ is not the typical experience for advisors. Throughout the initial portfolio construction, the process certainly applies, but perhaps a condensed version. The ongoing due diligence process throughout the management of the portfolio's lifetime in practice can certainly be altered. Most of the time, a wholesaler from an investment firm will present you with a solution for your portfolio or you simply come across an interesting fund.

That leaves the question – What should be the next steps? In practice, the wholesaler may suggest you need to increase allocation to international or that one of their proprietary funds has performed better than a fund in your portfolio. They might present you with an analysis of your solution against competitors which is certainly worth acknowledging.

The process ultimately needs to be altered, whether due to time constraints or capabilities. In most cases, this may warrant skipping directly to the analyze products step. Determine your own competitors in the space through research and compare those products. Consider the impact the change would have on the overall portfolio and whether the shift would improve the chances of achieving the portfolio goals. Determining what to sell or reduce in the portfolio is an additional step in the process, best done by considering the entire portfolio in a pre and post-trade analysis.  If you believe the solution is the correct choice, the portfolio manager discussion still applies as you might pick up some new information that was not available through research.

Due diligence can be tedious work, but it is rewarding. The decision to add a product to your portfolio should be a thoughtful one as it impacts several end clients and their ability to achieve their goals. Given there are thousands of options, it should be challenging to make it into one of the few positions in your portfolio. Having a thorough due diligence process increases that challenge for portfolio managers. If the solution is right for your portfolio, the product will reveal itself throughout the process. Remind yourself that it is a privilege for that fund to enter your portfolio, because being part of a management team myself, that is certainly the way we look at it.

Insights with Purpose

At Purpose, we are attempting to change the status quo within the investment industry – mainly the enigmatic standards by which the industry operates. We are an open book when it comes to portfolio design and discussions surrounding our outlook and strategies. We want to make managing portfolios simpler for advisors and act as a sounding board for ideas. We start by running portfolio comparisons between your portfolios and ours. Not to say ours is right and what you are doing is wrong, but to understand the differences and have discussions surrounding the rationales. We aim to keep this discussion going quarterly, and this is not a one-and-done service. We want to build our relationships with advisors so that the end client has a satisfactory investment experience.

Providing observations of portfolios over time and incorporating the whole portfolio is a lot more effective than a one-off discussion or simple fund comparison. Many portfolio analyses are presented with inaccurate data, and at Purpose, we can ensure the underlying portfolio attributes are accurate. There will be no missing fixed income duration or a mutual fund being incorrectly captured in "Other." We believe this is the most important element of portfolio discussions.

If you want to know what exposures your equity portfolio is tilted toward, feel free to reach out to our team. As the great Peter Lynch once said, "Know what you own and why you own it."

— Brett Gustafson is a Portfolio Analyst at Purpose Investments

Sources: Charts are sourced to Bloomberg L.P.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements ("FLS") are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as "may," "will," "should," "could," "expect," "anticipate," intend," "plan," "believe," "estimate" or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Brett Gustafson

Brett is a Portfolio Analyst at Purpose. He is responsible for relationship management and advisor support and focuses heavily on portfolio analytics for advisors, our own proprietary models, as well as equity research. With over nine years of experience in the investment industry, Brett started his career out as an Investment Advisor at a Canadian independent asset management firm where he cared for several high-net-worth families. Brett graduated from the University of Calgary with a Bachelor of Commerce degree. He is currently pursuing his CFA designation with the goal of becoming a Portfolio Manager.