The Mentor Journal
Portfolio Management
How to Level Up Your Pre-Purchase Decisions
Pre-purchase checklist
By Chris Nelson
June 19, 2020
Reading Time: 4 minutes

When it comes to managing the investment portfolio, finding enough time to analyze securities can be challenging. While your desire might be to deep dive into a potential bond’s characteristics, it isn’t always possible. Unfortunately, the rest of the “day job” also requires attention. The result could be having to make a pre-purchase investment decision with limited time, hoping that your due diligence efforts were thorough enough.

In addition to time constraints, there’s a desire to be confident in your decision making. Before you make an investment purchase, you want to be able to answer these important questions:

  1. What are we buying, and why are we buying it?
  2. Do I have the information and analysis necessary to make a purchase decision?
  3. What risks are present in the proposed investment? How could holding this security in the portfolio potentially “go wrong?”
  4. What’s the response if the bond doesn’t perform as expected or the potential risks become a reality?

Looking Back After the Trade Is Completed

An effective due diligence process is an integral part of making sound investment decisions before executing the trade. But without a system in place to capture your thoughts about the investment and the background research that went into the decision, you could end up second-guessing yourself after you have completed the trade.

“A well-developed pre-purchase process can help ensure that you have the answers you need both before and after the investment purchase.”

It is essential to have a process to record and organize your pre-purchase analysis so you can look back later. You’ll also want to be able to show that you completed a proper level of due diligence.

Occasionally, questions about past investment decisions may arise, whether from management, an auditor, or a regulator. Having the information available to provide historical context is very valuable. Why scurry around to explain the reasoning behind a particular bond trade? What about being able to demonstrate why an investment was a good fit for your balance sheet strategy and objectives? A well-developed pre-purchase process can help ensure that you have the answers you need both before and after the investment purchase.

The Search for a Solution

When I first became a portfolio manager, I wrestled with many of these same issues. While I’d feel good about investment decisions, I sometimes wondered if I’d covered all my due diligence bases. As I gained experience, I began to create mental and physical “checklists” to ensure that I had gathered the information I needed. I also took steps to organize my data to make it easier to retrieve if I needed it later.

As I began to follow these procedures, I found that I became faster at analyzing the bonds that came my way. I was quicker in making investment decisions while also feeling confident in doing so.

The routine also allowed me to organize my investment due diligence files since I used a standard, uniform approach for all security types. I found that follow-up investment conversations went more smoothly when I could retrieve the information that led to the decision. It was a great feeling when a conversation with an examiner went well because I could show the due diligence that I had completed, even if the trade had happened months before.

Introducing the Pre-Purchase Checklists

As I’ve helped others learn more about fixed-income investments, they’ve often asked me if I know of any tools or resources to improve investment due diligence and decision-making. As a result, I’ve created something to help manage that process.

Pre-purchase checklist pages

I’ve designed a package of pre-purchase checklists for the following fixed income security types:

  • U. S. Treasuries
  • U. S. government agency bonds
  • Municipal bonds
  • Residential mortgage-backed securities (MBS)
  • CMOs
  • Commercial mortgage-backed securities (CMBS)
  • SBA pools
  • Corporate bonds

Each worksheet has areas to record general trade and security information as a reference. There’s also a section to record your reasons for purchasing the investment, its risk factors, and your plans for an exit if needed. Finally, each worksheet contains a list of resources to help you analyze and evaluate the security.

As you might expect, many of the items on the checklists are screenshots from Bloomberg. If you don’t own a Bloomberg, that’s okay. Ask your broker to forward you the screens you need (after all, that is part of the service they should provide!).

While the checklists contain many items to help in your due diligence, they’re not all-inclusive. Instead, use them as part of a routine that includes your existing investment policy or decision-making procedures. Make the process your own, and it will make it that much easier to administer and maintain.

Get the Pre-Purchase Checklists Delivered to Your Inbox

To get your free copy of the fixed income pre-purchase checklists, click the button below to download them. Also, by signing up as a member of the Bond Investment Mentor community, you’ll receive my weekly email, where I share resources, tips, and updates about investments, portfolio management, and other related topics.

I hope that you’ll find the checklists to be a helpful tool in fine-tuning your investment process. They’ll help you perform a meaningful, organized evaluation of fixed-income securities before you pull the trigger. Additionally, you’ll have a record of the factors that went into the decision, which will help you when you need to review a past trade.

So, what are you waiting for?  Sign up now and you’ll have the pre-purchase checklists in your hands in no time!

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