Does a strategy “work”?  Is a manager “good”?

Those questions propel the great wheels of analytical machinery that spit out recommendations on what to buy and what to avoid in the world of investments.  It can seem as if those who work on that machinery are like Charlie Chaplin in Modern Times, tightening the bolts on the gears one moment and being swallowed by the machine the next.Doctor Macro | Here’s a classic movie still of the scene. The answers get spit out until the world changes, the line is retooled, and things start all over again.

Some of us are ill-suited for an industrial approach to analytical work, which is why I’ve been writing pieces on “investment states and styles,”the research puzzle | Here’s the whole series. looking for ways to add value by redefining the process and/or the categories.  While I’ll do similar postings going forward, this one marks the end of that particular series.

A few years ago, I helped an acquaintance who worked as an expert witness on a model of damages for a large pension fund.  The analysis was done in response to the revelation of corporate malfeasance at one of the firms in which the fund had invested.  Among the fund’s outside managers were quite a number that had been active in the stock.  To prepare the model, the expert witness had access to the transaction records from the fund’s custodial bank, and I was hired to help him make sense of them.

We went through the managers one by one, looking at the trades — when the stock was bought and when it was sold.  It was an interesting exercise, in that the stock was owned by a variety of different kinds of managers.  The nature and the timing of the decisions told a story of each manager, as did the execution of the trade orders, which ranged from from small lots being parceled out algorithmically to huge block trades being worked by Wall Street desks.

Think about that level of detail.  Having it, you can get an incredible view of a manager’s evolving exposures and can see exactly when adjustments are made.  Lacking it, you are forced to try to fill in blank after blank.  It might not be the key to the kingdom, but possessing transaction information fundamentally changes the nature of due diligence.

While there are products that provide that kind of transparency (old-fashioned wrap-fee accounts and their cousins the”clones” among them), it is certainly not the norm to have access to that information, unless you are an institutional investor using separate accounts.  Even in that case, the trail of analytical bread crumbs that is available is often not inspected to any great degree.

That’s a pity.  The chicanery (“window dressing” and “painting the tape”Wall Street Journal | See this recent Jason Zweig piece for a primer such “performance art.”) common for some managers at the close of each year comes into plain view.  More importantly, actions that illuminate (or belie) a stated investment policy are visible too, providing the raw material for the kind of due diligence questions that should make up the bulk of interactions with managers.  There are no better “how” questions than ones that arise from observable actions (even minor ones) of a manager at a specific market moment.  They can’t be found in the performance numbers and statistics and exposures cited in investment manager review books, although they make those numbers come alive.

Look where others don’t look.  Examine every detail that you can.  Follow the trades where they lead you.