Money Manager Due Diligence Scott Thoma, CFA. The Challenge > 7,000 Separately Managed Account...
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Money Manager Due Diligence Scott Thoma, CFA
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Transcript of Money Manager Due Diligence Scott Thoma, CFA. The Challenge > 7,000 Separately Managed Account...
Money Manager Due Diligence
Scott Thoma, CFA
The Challenge
> 7,000 Separately Managed Account Options
> 7,000 Distinct Mutual Funds (> 25,000 when incorporating share classes)
The Challenge
Investors judge on short-term performance
Fiduciary duty?
Urge to "do something"
How Do You Conduct Manager Screens? 4 P's
Performance
Performance
Performance
Performance
How Do You Conduct Manager Screens? 4 P's
Performance Historical Risk-adjusted Star rankings
People
Philosophy
Portfolio
Universe (7,000+ Funds)
Mutual Fund Selection Process
Target Universe
Identify managers with records of performance success
Judge whether success is repeatable
Selection
Evaluate factors leading to success
Removal
•Change in thesis•Better alternative
List of Approved Managers•Investment thesis
•Team discussion
People Process Portfolio characteristics
Rolling period performance Risk-adjusted performance Performance Attribution
Manager Initiation - RFI Process
Personnel - Changes in structure, coverage, resources
Process
Portfolio structure & philosophy
Ownership
Qualitative Analysis
Level of experience
Key decision makers
Resources
Performance and financial incentives
Qualitative Questions
How does the portfolio management team identify attractive investment ideas?
How does the investment team build the mutual fund portfolio?
Does the investment process make sense?
Is the overall investment process repeatable?
Investors Chase Performance
Source: Ned Davis Research, Inc.
Rolling Period Analysis – Fund A
Morningstar Rankings (end of 2008) 1-Yr: 97th Percentile 3-Yr: 96th Percentile 5-Yr: 91st Percentile
Rolling Period Return Analysis Fund outperformed its benchmark and peers in
88% and 99% of 5-year rolling periods, respectively.
Outperformed its benchmark and peers in 76% and 86% of 3-year periods, respectively.
10-Yr Morningstar Ranking: 9th PercentileSource: Morningstar
Portfolio…Or Collection of Funds
Source: Morningstar
Differences in Styles Leads to Differences in Performance
Fall/Winter 2008
Deep Value Underperforms
Eclectic & Conservative Managers Outperformed
Spring/Summer 2009
Deep Value Outperforms
High Quality Underperforms
Understanding Fund Differences
International Fund Performance Differences Emerging markets allocations
Currency hedging
Importance of Understanding Fund Differences
Source: Morningstar
96%
75%
86%
-500 bps -800 bps -1000 bps or Worse
Periods of Relative Underperformance vs. S&P500 Rolling 1-Year PeriodsTop Quartile Managers Q1 1998–Q4 2007
Past performance does not guarantee future results. Universe—Large-Cap domestic equity; 164 large-cap managers whose 10 year average annualized performance ranked in the top quartile from January 1, 1998– December 31, 2008 were analyzed.Source: Factest, PSN and AllianceBernstein
Even Top Managers Endure Tough Times
55%
31%21%
-100 bps -300 bps -500 bps or Worse
Periods of Relative Underperformance vs. S&P500 Rolling 3-Year PeriodsTop Quartile Managers Q1 1998–Q4 2007
Past performance does not guarantee future results. Universe—Large-Cap domestic equity; 164 large-cap managers whose 10 year average annualized performance ranked in the top quartile from January 1, 1998– December 31, 2008 were analyzed.Source: Factest, PSN and AllianceBernstein
Even Top Managers Endure Tough Times
Even Top Managers Endure Tough Times
% whose Rolling 1-Year Performance Fell into the Bottom of the RankingsTop Quartile Managers Q1 1998–Q4 2007
100% 96%
71%
Bottom Half Bottom Quartile Bottom Decile
Past performance does not guarantee future results. Universe—Large-Cap domestic equity; 164 large-cap managers whose 10 year average annualized performance ranked in the top quartile from January 1, 1998– December 31, 2008 were analyzed.Source: Factest, PSN and AllianceBernstein
Consistent Performance Is Elusive: Even Top Managers Endure Tough Times% whose Rolling 3-Year Performance Fell into the Bottom of the Rankings
Top Quartile Managers Q1 1998–Q4 2007
84%
54%
24%
Bottom Half Bottom Quartile Bottom Decile
Past performance does not guarantee future results. Universe—Large-Cap domestic equity; 164 large-cap managers whose 10 year average annualized performance ranked in the top quartile from January 1, 1998– December 31, 2008 were analyzed.Source: Factest, PSN and AllianceBernstein
Detailed Performance Review
Peer review Attribution analysis Drift
Drivers for Removal
A significant negative change to the fund's portfolio management team
A significant change to the fund's investment process
Investment style or investment process drift
A better alternative within the same asset class
Underperformance (relative to style and process)
Issues With Star Rankings
Portfolio/Style Bias
Short-term Performance Bias
Share Class Bias
Category Changes
Manager Changes
Issues With Star Rankings
Not predictive of future performance
“In short, the star rating is a backward-looking measure of past performance. What it is not is a forward-looking measure of fundamentals.”
- Russell Kinnel, Morningstar
Regulatory Issues
Fiduciary Standard
Target date funds
12b-1
The Challenge
Number of options
Evaluating performance
Urge to "do something"
Time / resources
The Opportunity
Standard process for evaluation
Better decision making process
Better portfolios
Better client experience
Questions / Comments?
