Verifying the application of policies 91
Verifying the application of policies
One way for you to work out whether a manager actually uses his
internal processes and documentation on a day-to-day basis is through
an onsite visit. Although you might be able to obtain 70 per cent of
the information on the fund’s operations prior to meeting the man-
ager and his team, you cannot, by reading alone, determine if things
are being done in the way they are set out in the operations or com-
pliance manual. I believe that an onsite visit is invaluable to your
understanding of the fund’s operational processes and procedures.
This is your chance to verify that what is said is done.
Essentially, my kind of onsite visit goes beyond seeing and shaking
the hand of the manager’s key principals and a swift tour of the office.
What is most important is that you talk to the back office staff and the
accountants in the middle office. You must also be allowed to do so
without the supervision of senior management. The reality is that the
back office and middle office staff is where the real knowledge of the
manager’s operations resides. In addition, these staff members tend to
be less trained to respond to investigative questions in comparison to
the sales and relationship management teams. The middle office and
back office operational staff also have better knowledge of non-invest-
ment related risks and will most likely give you a more candid answer.
When you review these operations and you ask key questions, it is
vital that you establish the degree of independence that exists inside
the control functions of the manager. For example you want to ascer-
tain whether there is a clear separation of duties between those who
take financial risks (the front office) and those who manage and con-
trol these risks (the middle and back office). As an investor, it is wise
to consider whether investment committee and risk committee meet-
ings are the norm and occur on a regular basis. The best way to check
this is to see the actual recordings of these meetings, usually by way
of minutes. This can be used as a source of information to see if there
has been any decision taken in relation to investments or if there have
been any amendments to investment guidelines or trading processes. If
assets are hard to value you may look for a valuation committee as well,
as this again provides an insight into how seriously questions of valua-
tion are taken and whether there is a proper process behind them.