Touchstone Investments keeps records on roughly 400 asset managers it has met and, in most cases, has not hired.
Most fund companies solve the talent problem by employing portfolio managers. Touchstone does not employ any. Every one of its mutual funds and ETFs is run by an outside firm, which makes picking those firms the entire business rather than a support function.
"If we all took the mentality of one of the first things we ever learned in this business is buy low and sell high. It makes sense to buy great managers low too."
Tim Paulin runs investments and practice consulting at Touchstone, sits in on the investment policy meetings of the firms he is considering, and has been doing the job long enough to have watched the mid-2010s rush to package hedge funds as daily-liquidity mutual funds fall apart over fees.
The full interview is covered here so you can skip it. 37 minutes of audio, 19 minutes of reading.
Here are the 13 principles that matter.
👤 Guest: Tim Paulin, Senior Vice President of Investments and Practice Consulting at Touchstone Investments, which runs every one of its funds and ETFs through an outside sub-adviser rather than in-house managers
🎙️ Host: David Cohn, who leads mutual fund and active research at Bloomberg Intelligence
📰 Published: 15 September 2026 on the Inside Active feed
🟣 Apple Podcasts | 🔗 Episode page | ⏱️ 37 min | ✅ Time saved: 18 min
Key Takeaways
Touchstone will not hire a manager who might not be in business next year, whatever the returns say
It collects financial statements at least annually, and reads the balance sheet for debt that would stop the firm investing in its own people
The screen is five things, and results is only one of them
Stability, personnel, investment discipline, infrastructure and results — four parts qualitative, one part quantitative
A manager who only knows the post-crisis market is hard to underwrite
Fifteen-plus years of a US-centric, growth-leaning market means most track records cover one regime
Underperformance is only a problem if it happened for the wrong reason
A high-growth manager should lag when low-growth stocks are being rewarded, and Touchstone checks that it did
Passive competes only on price, because there is nothing in cap-weighted indexing to protect
The reason to hold an active manager is that it behaves differently, so punishing it for that is the investor's error, not the manager's
Investors buy managers at the peak of their relative performance and sell them at the trough
Paulin's fix is to separate the judgment of who is good from the decision of when to buy
A liquid-alts push in the mid-2010s died on fees, not on performance
Hedge fund managers used to a base fee plus performance fee would not work for registered-fund rates
1. The Sub-Advisory Case
Cohn opened by describing manager selection as its own investment discipline: past performance tells you what a manager achieved, not why, whether the process repeats, or how they will behave when their style falls out of favor. He then asked Paulin for the case for the sub-advisory model.
The advantage Paulin names is that Touchstone does not have to recruit. It can find talent wherever it sits, anywhere in the world, and hire managers who have already produced alpha, rather than hiring people internally and finding out.
"We don't like to experiment with shareholder dollars." The firm looks for demonstrated success instead of giving an inexperienced manager a portfolio to see what happens.
The demand side comes first, not the manager. Touchstone's clients are intermediaries building portfolios of mutual funds and ETFs, so the first question is which asset categories those intermediaries want and whether the demand looks lasting.
The second question is a two-part test on the manager. Has the manager demonstrated historical alpha, and does the manager also have the characteristics that academic work and Touchstone's own research associate with future alpha? Past alpha alone does not clear it.
2. Where a Search Begins
Cohn pointed out that thousands of strategies and firms compete for assets, and asked where a search actually starts.
Touchstone tries to meet managers before it needs them. Paulin called it a "pre-open-door" approach rather than an open door — the point is to know firms already, so the company is not starting flat-footed when it has to replace a manager or launch in a new category.
The first place it looks is its own archive. The research archival system holds records of past interactions with managers, some of them years old, which gives both a perspective on the firm and an existing relationship.
"There's probably 400 managers that we have within that research archival system that we have some level of knowledge on."
The archive is then married to a database search. Paulin named Morningstar Direct and eVestment, where Touchstone can find managers, pull separate account composites and learn about them at a high level.
Quantitative screens narrow that list before anyone picks up the phone. The firm applies its own multi-factor screens to decide who might fit, then engages those managers directly to complement the ones it already knows in that asset category.
3. The SPDR Framework
Asked what a manager has to show to make it onto the radar — and what eliminates one early — Paulin gave the firm's version of the four or five Ps that asset manager research groups commonly use. Touchstone calls its own version SPDR.
The letters, in his own gloss, are stability, personnel, investment discipline, infrastructure and results. He joked about the spelling while doing it.
"It's really four parts qualitative, one part quantitative." The quantitative part is the results, and Paulin's view is that future results depend on the four qualitative elements around them.
Organizational stability is the first filter and it is about survival, not style. A firm with limited people, limited technology and limited assets is probably not yet profitable, and Paulin said it is hard to imagine putting that firm's strategy into a mutual fund or ETF.
"We don't want to be working with PMs that are thinking about, am I going to be able to keep the lights on this week?" The next sentence was about making payroll.
What he wants to see is a small firm behaving like a large one. The forethought he looks for is a manager preparing to be every bit the institutional asset manager that a firm several times its size is, because that structure is what a fiduciary needs before it can invest.
"We want to see evidence of sustainability from an organizational standpoint."
Personnel evidence runs the same way. Seasoned staff who have been in place a while, or the opposite — a lot of turnover.
The quantitative work is deliberately not recent. Touchstone looks at rolling periods, going back as far as the record allows, to cover different market environments — rather than the "what have you done for me lately" test that he said tends to drive selection in the marketplace.
The question asked of each period is conditional. Did the manager outperform when they should have, and how did they weather the storms, given that any genuinely active strategy goes through peaks and troughs of relative performance.
4. Skill vs a Kind Market
Cohn put the central problem to him: separating real skill from a portfolio that simply happened to be in favor.
The first pass is consistency, with a caveat built in. Paulin looks at how consistently a manager delivered alpha, while accepting it will never be 100% — a manager applying a discipline consistently will be out of favor when the market rewards something else.
Standard attribution tools are the starting point but not the answer. He named Brinson attribution and style attribution as common approaches in manager research.
His worked example is why sector attribution misleads. Take a high-growth manager measured against the Russell 1000 Growth index. Within a sector such as consumer discretionary, the stocks being rewarded in a given period might be very low-growth names, stable on earnings quality and earnings consistency.
Those are not the stocks the manager was hired to own. If the mandate is high top-line and high bottom-line growth, there is no reason to expect outperformance in a period when low growth was rewarded.
"So we really have to uncover those elements and ask ourselves, why did that outperformance or underperformance occur?" The test is whether what happened is consistent with what the process should have produced.
5. Behind the Returns
Cohn asked how Touchstone looks behind the returns to understand how they were generated, and whether that means examining what the manager buys and sells.
Purchases and sales are the cleanest evidence of process. A buy at a particular moment should show how the discipline identified that company and which characteristics made it a fit.
Above the trade level, the test is portfolio shape. Does the portfolio carry characteristics, relative to peers and the benchmark, consistent with the process as Touchstone understands it?
"And a lot of that kind of early days, and we can go years getting to know a manager before we actually make a decision to hire them."
What those years produce is an expectation, not a verdict. The formative period is about building reasonable expectations of what the process should do at any given point in the cycle.
The tool set is named. Bloomberg sits on the desktop of every manager research analyst at Touchstone, alongside Style Analytics for looking at style exposures over time at a granular level.
Paulin was explicit about what those tools produce. A lot of the time it is not answers — it is a prompt to ask more questions about what was going on at a particular moment.
6. How Long a Track Record
Cohn asked how much the length of a standalone track record matters, and whether Touchstone can get comfortable with a talented manager who does not have one yet.
A short standalone record is not disqualifying if there is history elsewhere. Paulin said credentials and experience from a prior firm count, and that carving out that history is straightforward for his team.
The question asked of the prior record is about authorship. "Understand, okay, were you really a decision maker?" Were you the one pulling the trigger on buys and sells in that portfolio?
He called this an advantage of the sub-advisory model. Touchstone is not limited to what the manager has done at the current firm; it can look back across earlier ones.
"If it's somebody that has only experienced a singular market environment, it's hard to really get comfortable with how are you going to adapt as things change, as headwinds might turn into tailwinds and vice versa."
The problem is that the last 15 years have been one environment. Since the financial crisis the market has been US-centric and growth-leaning, to the point that people now talk about massive concentration risk, with an AI theme and a mega-cap theme driving much of it.
That leaves a lot of managers with only one regime on their record, which he said makes the assessment harder.
Even so, he says there are usable turning points inside it. Going from 2020 into 2021 and 2022 moved the market between rewarding downside protection and rewarding companies with low or no earnings — and across what he called a fairly homogeneous 17 or 18 years, those shifts are where Touchstone can see how a manager responded.
7. Weighing the Five Factors
Cohn noted that Touchstone talks about organizational stability, personnel, investment discipline, infrastructure and results, and asked whether strength in one can compensate for weakness in another.
Some of the five are absolute and cannot be bought off with returns. The extreme case Paulin gave is a firm that is unprofitable and might not be there next year.
"We're going to gather financial statements at least annually, sometimes quarterly for our existing managers" — and for any manager it is considering launching a fund or ETF with.
Two things on those statements are warning signs. A lack of profitability, and debt on the balance sheet large enough to hamstring the firm's ability to invest in itself or in its people.
Compensation structure is read as a retention question. Touchstone digs into whether the incentives are adequate to keep people, and treats turnover as a symptom: is it happening because the firm cannot sustain itself and hold good people?
Those specific failures cannot be offset by anything else.
On personnel the test is credentials and experience — evidence of the kind of experience any fiduciary would want before entrusting shareholder assets to a firm.
The overall judgment is a mosaic with floors. Paulin said Touchstone looks across all five factors together, but will not go below a certain level on any single one.
8. What a First Meeting Buys
Cohn asked what Paulin is trying to learn in a first meeting that a presentation or a database cannot give him — and, in a follow-up, how he works out whether a manager is actually following the stated philosophy.
The first thing is to meet more than one person. Paulin wants to see the decision-making structure on the investment side rather than hear from a single individual, and to work out who decides what goes into the portfolio.
He will sit in on investment policy meetings where he can. What he is watching for is the interaction: whether team members play devil's advocate with each other.
"Is there one person that seems to be leading all the decisions and is really doing all the talking?" The alternative he prefers is a collegial environment where people challenge each other toward better decisions.
He also splits the meetings up deliberately — leading with the lead portfolio manager, then meeting a couple of analysts separately.
Beyond the investment team, he wants the traders, compliance and operations. That is the infrastructure surrounding the process that lets it run day to day.
Investment due diligence is only one of three prongs at Touchstone. The finance team collects the financial statements and works through the income statement, balance sheet and cash on hand; the compliance team handles operational due diligence and the daily monitoring of consistency with the prospectus.
He brings specific stocks to the meeting, and not only the flattering ones. Some are names Touchstone sourced itself as good reflections of the process; others are ones that look like a poor fit with the stated discipline, precisely to test where the discipline bends.
Verification afterward runs on full data, not spot checks. Touchstone has every purchase, sale and holding over time, and checks portfolio characteristics — valuations, growth rates, debt to capital — against the tenets the manager describes.
Picking three stocks at random is explicitly not the method. Paulin looks for examples across different sectors, to see how different people in the organization contribute to picking stocks, or bonds, and to find the holdings that depart from what he would expect.
9. When the Firm Kills It
Cohn asked whether Touchstone has ever liked a manager and walked away because of the firm.
Paulin's framing is that investment quality is necessary but not sufficient. The relationship has to work as a business, not only as an investment.
His example is the mid-2010s liquid alternatives boom, when product developers were trying to bring traditional hedge fund managers into daily-liquidity registered funds.
The first finding was about the strategies. A majority of the time, Paulin said, they did not translate well to a daily-liquidity structure.
The second was about the fees, and it was the one that ended conversations. Hedge fund managers were used to a high base fee plus a performance fee on top. Shown the going rate for the nearest equivalent equity or fixed income strategy in the daily-liquid registered fund world, the answer was "I don't think we could work for those kind of fees."
"You don't want to build a relationship with somebody that's mentality is completely foreign to the mutual fund and ETF space." A manager who comes in grudgingly will not make capital budgeting decisions that favor the shareholder experience.
The disconnect shows up before the fee negotiation even starts, which is where Paulin said you can tell it will not be a fit.
The reason fit matters this much is Touchstone's structure. "We're an extension of their brand, really." Its funds are typically single manager and single strategy rather than multi-manager, so the same team the manager sells to institutions in separate accounts is the team inside the fund.
That makes distribution a joint effort. Both firms have to collaborate to get the story out and explain the manager's qualities, which takes resources the sub-adviser has to be willing to commit.
10. Truly Active or Not
Cohn raised Paulin's own writing on identifying truly active managers, said he has covered funds long enough to know there are a lot of index huggers, and asked what separates genuine judgment from a slightly modified benchmark.
Paulin declined to argue with committed indexers. Some clients are strictly passive, and he said Touchstone is not going to do missionary work to change their minds.
He thinks the active-versus-passive argument is narrower than it sounds. Most US financial professionals building portfolios use some combination of the two, and the debate is overblown because it is almost entirely about large caps.
Where he sees conviction in active management is outside that. The advisers Touchstone serves are believers in small caps, mid caps, international and fixed income, even where they use passive for part of their large-cap exposure.
His framing of the choice is diversification, not winners. If the building blocks of a portfolio all react to the same drivers at the same time, they are not diversifying anything.
The measures he uses are tracking error and active share, viewed over time — not on the most recent portfolio alone, but across history, to see whether a manager has consistently differentiated from the benchmark and from peers.
On the economics of the alternative: "You're looking at the academic definition for passive is cap-weighted indexing. So it's whoever can do that the cheapest that's going to win in the long run, right?" He described passive as a race to the bottom from the standpoint of there's no IP to protect.
Which is why paying for a closet indexer makes no sense to him. If passive is already in the portfolio, adding something next to it that does the same thing serves no purpose.
He named the mentality he blames. People talk about markets in terms of winners and losers, as if nothing in a portfolio should ever be lagging. "But I've got to have things that are zigging when other things are zagging if I'm truly going to get diversification."
He applies the same logic inside equities. Investors already accept that fixed income should behave differently from equities; the same thinking belongs between categories within equities.
11. Monitoring After the Hire
Cohn turned to monitoring, and asked how Touchstone decides when poor performance should be tolerated and when it signals that something has changed.
The transition is from building expectations to watching daily. Once hired, Touchstone has daily access to every stock in the portfolio and every purchase and sale.
Quarterly calls cover the trades and the attribution. Paulin's team talks to the portfolio managers about decisions made, walks all the purchases and sales, and looks at attribution by sector.
The key question on those calls is diagnostic. Was a performance gap environmental, or was it an idiosyncratic problem with specific securities the manager bought or had held for a while?
Once a year Touchstone goes on site for several hours, to interact directly with different parts of the organization.
The rest of the monitoring has to be unscheduled. Paulin said the structure covers the calendar, but events do not wait for it.
The event he singled out is corporate, not market. Many of Touchstone's managers are independent, employee-owned firms, and at some point may be involved in a corporate transaction.
A deal threatens two things at once: the sub-advisory contract itself, and the perceived benefit of the partnership to both sides.
12. What Investors Get Wrong
Cohn put the standard case against active management to him — the average active manager struggles to beat the benchmark after fees, and selecting managers is itself a skill — and asked what investors get wrong when they conclude active does not work.
"When you hire a manager, you're hiring a process." You are hiring people to apply that process, and if you are diversifying properly you want it to differ from the benchmark.
The complaint arrives as soon as the benchmark wins. Paulin's example is a benchmark concentrated in an AI theme and in growth characteristics, against a manager hired for valuation sensitivity so they would not overpay for growth — and then "why am I going to ding that manager for doing what I hired them to do?"
"If I'm finding a manager that's doing what I hired them to do, then shame on me for hiring that manager if I just wanted them to act like the benchmark whenever the benchmark was doing well."
His diagnosis is a short memory plus a thin grasp of diversification, which means different parts of a portfolio behaving differently at different times.
The analogy he reached for is a horse sale. An owner takes a young horse to the two-year-old in training sale and shows as much speed as possible; buyers get excited about the speed and do not ask about stability, or whether the breeding makes the animal injury prone.
The parallel he draws is that speed is the recent return. Buyers check whether return was maximized over the most recent three, five or ten years, pile in on that evidence, and often do it at the worst possible moment.
His proposed fix is to split one decision into two. Bifurcate the judgment of what makes a great manager — qualitatively and as an identification of skill — from the decision of when to invest with that manager.
"It makes sense to buy great managers low too." And, he said, exactly the opposite happens.
"The times that people flock to particular managers is the peak of their relative performance." When a manager is in line with the benchmark or behind it, investors read that as an indictment of skill rather than an opportunity to get in.
13. What the Best Share
Cohn closed by asking what the very best managers have in common that performance alone does not reveal.
"I would say in a word, it's having a long-term mentality about the sustainability of delivering value to their clients."
The failure mode is theme-chasing, and it comes from the same pressure investors apply. A manager watching an AI theme dominate may not see the characteristics their process looks for, but feels obliged to own it because the gap to the benchmark and to peers is widening.
"So they'll chase a theme. That's a short-term mentality, right?"
What he wants is evidence of a discipline held through a bad stretch — applied over time, tested in difficult periods, with the manager sticking to it.
His case study is the late 1990s. Value managers watched growth stocks run, and found growthier companies entering the value index because of how the indexes are built.
The rationalization of the day was relative value. Managers told themselves that paying 30, 40 or 50 times earnings was justified because earnings would grow faster than the multiple — which Paulin called a clear departure from the discipline they had applied for years.
Some genuinely good value firms thought they might not survive it. He said firms still in business today felt at the time that they could go out of business if things did not turn — and they did turn, because the valuations got extreme enough not to be justifiable.
"But we want people to continue to apply their discipline and process as we understand it, because there's no way to monitor people effectively if you don't know what they're gonna do tomorrow."
Bonus Insights
Cohn's opening framing was his own argument, not the guest's: that choosing the manager can matter as much as choosing the strategy, and that manager selection is therefore its own investment discipline.
He also disclosed his own position at the end, saying he is a proponent of active management, and earlier that he has covered funds long enough to know how many index huggers are out there.
Paulin distinguished between an open door and what he called a pre-open-door approach — a small phrase that carries the whole practice of meeting managers years before there is a mandate for them.
The SPDR acronym is a joke Paulin makes at his own expense, since the letters only work if, as he put it, you do not know how to spell very well.
Touchstone applies the same holdings-level scrutiny to bond managers as to equity managers, which Paulin mentioned in passing when describing how different people in an organization contribute to picking securities.
Cohn's question about whether one strength can offset another weakness produced the clearest structural answer in the interview: the five factors are a mosaic, but each has a floor.
Paulin's bottom line is that manager selection is a judgment about whether a firm will still be applying the same discipline in ten years, and that the timing of when to buy that manager is a separate decision most investors get backward by hiring at the peak of relative performance.
Products, Companies & Tools Mentioned
Touchstone Investments (Paulin's firm; it manages no money itself and runs every fund and ETF through a single outside sub-adviser, so manager selection is the whole business)
Morningstar Direct and eVestment (The databases Touchstone searches for managers it does not already know, pulling separate account composites before applying its own quantitative screens)
Bloomberg (On the desktop of every manager research analyst at Touchstone)
Style Analytics (Used to look at a manager's style exposures over time at a granular level — Paulin says it surfaces questions more often than answers)
Russell 1000 Growth (His example benchmark for showing why sector-level attribution misleads when the stocks rewarded inside a sector are not the ones the manager was hired to own)
Books & Resources Mentioned
How to Identify Truly Active Managers – Tim Paulin (The piece of his own writing Cohn raised when he asked what separates genuine investment judgment from a slightly modified benchmark)
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