Narrative, Storytelling, and Qualitative Due Diligence

Abstract

Despite the overwhelming focus of researchers on quantitative analysis to measure manager skill or alpha generation, managers and investors still employ qualitative information and narrative as key decision support tools for investment manager selection. Both parties allocate significant time and effort reviewing and explaining investment processes through pitchbooks, meetings, and nonquantitative communication. This article explores the use of qualitative information linked to narrative, the description and interpretation of facts to tell a compelling story on manager skill, as a key forward-looking signal mechanism that supports asset management allocation decisions. We focus on how and why narrative is an important part of the due diligence process for transmitting and receiving unobservable information outside of performance track records and a means for providing skill explanation.