Our Due Diligence (DD) method is not an isolated process; it is a crucial part of a broader investment cycle. When engaging with potential clients, we do not merely inquire about the stakeholders and the existing mandate. Our primary question focuses on the investment cycle employed by the investor. We view this cycle as the foundation upon which our DD method must align, ensuring it appropriately reflects the cycle, the mandate, and the stakeholders involved.
In essence, an investment cycle is a variant of the well-known management cycle ‘plan-do-check-act.’ To elucidate the concept of an investment cycle further, we refer to the guidelines provided by the Dutch Central Bank (DNB). In the context of DNB’s oversight of investment funds, the term “investment cycle” denotes a systematic approach that managers must follow in managing their investments. This encompasses the various steps and procedures involved in managing investments, such as planning, execution, monitoring, and evaluation of investment strategies. This cycle ensures that managers operate consistently and purposefully, with attention to risk management, returns, and regulatory compliance.
The first step in this cycle is the formulation of objectives and principles. This involves establishing the goals, ambitions, risk tolerance, and investment assumptions of the investment fund, within the frameworks of legislation, the implementation agreement, and consultations with stakeholders. This policy formulation forms the basis for the strategic investment policy. Following this, the strategic investment policy determines the strategic and tactical distribution of investments across various categories (Strategic Asset Allocation – SAA and Tactical Asset Allocation – TAA). This also includes setting the hedging policy for interest rates, currencies, and inflation to manage unwanted risks.
The third step is implementation and outsourcing, where specific investments that meet the criteria of the strategic investment policy are selected. This process encompasses both the idea generation and elaboration phases. After selection, the investments are executed, with agreements documented in a Service Level Agreement (SLA) and ensuring proper organizational setup for both internal and external management.
Monitoring and execution form the fourth step. This involves continuously tracking the performance of investments and assessing progress relative to the objectives. Monitoring occurs at both the total level, analyzing the performance of all managers collectively, and at the manager level, evaluating the performance of individual managers. Risk management, which includes identifying, measuring, and controlling investment risks, is also an integral part of this phase.
The final step in the cycle is evaluation and adjustment. This involves evaluating the investment process to determine whether expectations have been met. Based on returns and risk measurements, adjustments are made as necessary. Regular and transparent reporting to stakeholders about performance, risks, and compliance with the investment strategy and objectives is essential.
Establishing and adhering to an investment cycle enables managers to handle the entrusted capital responsibly and systematically. This not only aids in achieving investment goals but also minimizes risks and ensures compliance with legal requirements and best practices in asset management.
Every investor would benefit from establishing an investment cycle. The advantage of this approach is the creation of a logical and consistent mandate within which it can be assessed whether an idea fits the policy guidelines and chosen asset allocation during a DD process. This is why we consider the employed investment cycle the foundation of any due diligence effort and make sure that our DD method aligns, ensuring it appropriately reflects the cycle, the mandate, and the stakeholders involved.