SunGard Advisor Technologies Due Diligence and Monitoring Process.

SunGard Advisor Technologies

Due Diligence and Monitoring Process

Disciplines of the Research Group within SunGard Advisor Technologies (SAT)

Investment Outlook

Market Commentaries

Market Environment

Mutual Fund Research

SAM Research(Search & Due Diligence) SAM Monitoring

Custom Client Proposalsand Recommendations Client Monitoring

Market Research Investment Consulting

An Experienced Team of Professionals

• SAT’s due diligence staff are experienced, qualified professionals

– Previous employers include A.G. Becker, American Express, Callan, First Boston, First Union, Franklin Templeton, Goldman Sachs, Merrill Lynch, PricewaterhouseCoopers, Prudential Securities, SEI, and Wyatt Consulting

– 16 professionals are involved in the due diligence process

– Experience working with asset values from $100,000 to $35 billion

– Senior staff averages more than 18 years of experience

Over 50% of our senior professionals have advanced degrees and professional certifications, including CFA® and CIMA

Due Diligence Philosophy

• Provide thorough, timely due diligence

• Identify the characteristics that will influence future performance

• Managers may not be what they seem– Track records and staff turnover

– Style drift to capture alpha

– Client terminations masked by client additions and asset growth

• Due diligence requires complete objectivity by experienced specialists

SAT’s Institutional-Quality Due Diligence Process

Identify Manager Universes

Comprehensive Analysis

Due Diligence Committee

Monitoring of Managers on Approved List

Developing the Manager Universe

• SAT uses several databases to identify and screen managers

– M-Search, Nelsons, Morningstar

• Other sources include:

– Industry periodicals

– News services

– Recommendations from institutions and advisors

– Managers in competing programs

– Wholesalers

Manager Search Process

• Objectivity• Proprietary Screening

– Database of more than 12,000 managers– We apply minimum requirements

• Performance, longevity, growth of assets, turnover

– We differentiate managers by style– We analyze relative performance

• Relative rank to the universe of managers with similar investment styles• Relative to appropriate indices

– We perform risk analysis by manager• Rolling time periods, point in time• Key statistics used

Large

Small

Value

Mid

GrowthBlend

Rolling-Period Chart Example

• Performance

• Most risk measures

Transamerica Investment Management, LLC - Large Growth as of 9/30/04.Benchmark: Russell 1000 Growth.Source: Checkfree/Mobius M-Search.

Point-in-Time Analysis Examples

• Scattergrams

• Market Capture Ratios


Representative Due Diligence Analytics

• Manager data is subjected to several analytical processes

• Style analysis: returns-based and point-in-time

• Drift analysis (allocation)

• Dispersion of returns

• Performance disparities

• 14 risk measurements

– ơ, ß, ą, Sr, Tr, DSr, R2, Te, Up-Cap, Dn-Cap, Ir, Neg. Qtrs, Best, Worst

• Turnover and timing• Allocations: generic, asset class, sector, industry, security

• Consistency of returns• Cash positions: timing, buying reserve, policy

• Closet indexers (allocation)

• Efficient market securities (securities)

• Number of positions: range, average

• Staff ratios: clients, growth

• Win/Lose: assets, clients

Representative Due Diligence Analytics

• Returns-based style analysis and point-in-time


Preliminary Review Process

• The initial screening process– 18 questions and 30 points of data– We may be looking for a manager for a particular

asset class, style, or geography

• We obtain information that may exclude the manager from the comprehensive due diligence process– Performance, fees, legal problems, staff turnover,

negative asset flow, etc.

• Interviews conducted by SAT analysts, if necessary

Base Criteria

Criteria Principal Requirements

Assets Under Management $500 million if in business less than 10 years; $1 billion if in business more than 10 years.

Years In Business 5 Years

Actual Track Record Must be real assets; simulated results are not acceptable

AIMR Compliant Must be compliant; prefer to also see a CFA on the portfolio management staff

Audited Track Record Preferred but not required

Investment Professional Turnover for Last Three Years 0% if less than 10 investment professionals; <20% if more than 10 investment professionals

Organization Changes Prefer no changes for the length of the track record; mergers/ acquisitions are evaluated on a case-by-case basis.

Registrations/Legal Issues No issues in the last 3 years

Performance 1,3,5, and 10 year Rankings Above median in universe of peers for each period, or able to demonstrate upward trend as a result of new professional staff

Change in investment philosophy or strategy for the term of the track record No changes during the period measured by the track record

Timing Strategies or Derivative Investments None

Track Records

• Track records must be real assets at the firm

• AIMR-PPS track records

• Audited track records are preferred

• Minimum of five years of data for core services

– Prefer three-year track records for specialty services

or asset classes that are difficult to fill

• We screen for creativity that can affect results

– Number of accounts in composite

– Mutual fund or model results vs. real

– Percentage of assets relative to the total product

assets

Comprehensive Review

• 28-page questionnaire with more than 400 points of data

– Close-ended questions to eliminate subjectivity or marketing

"spin“

• Determine the quality of the manager

• Analysts review style adherence, performance

dispersion, consistency, experience of key professionals,

historical and projected asset growth rates, and a

number of other factors

• Interviews conducted by SAT analysts

Base Criteria

Criteria Principal Requirements

Composite Must have multiple account representation; single account composites not allowed; composite must represent a significant portion of the strategy considered

Asset Growth Trends Steady Annualized Growth rates; no negative trends; staffing sufficient to match growth rates

Business Composition Demonstrated presence in respective marketplace (wrap, institutions, etc.); 3 years desired unless professional staff demonstrate prior experience in the field

Professional staff qualifications Lead manager(s) possess a minimum of 10 years investment experience

Investing policies Must have established policies for cash balances, concentrated positions or sectors

Sell Discipline Defined process to minimize downside risk

Performance 1,3,5, and 10 year Rankings, and Rolling Period Rankings Above median in universe of peers for each period, or able to demonstrate upward trend

Risk 1,3,5, and 10 year Rankings, and Rolling Period rankings Above median in universe of peers for each period, or able to demonstrate upward trend

Risk statistics 3-year statistics favorable compared to relative benchmark (Standard Deviation, Beta, Alpha, Sharpe Ratio, Consistency, Treynor Ratio, Low Tracking Error, High Information Ratio, Downside Risk, et cetera)

Portfolio Characteristics Test of representative portfolio results indicate similar characteristics to relative benchmark and as stated by firm, unless process clearly allows for deviation.

Style Bias Disciplined within stated philosophy; no identifiable drift


• Comprised of all senior staff and analysts

– Multi-discipline group of professionals

• Meets weekly to review all new and updated due diligence information

• Approves all additions and deletions to the Approved List

• Monitors the Watch Lists– Problem and new managers

• One of the committee’s primary responsibilities is to challenge the work of the analysts

• Findings memo available on all managers reviewed

Findings Memo

• Brief Summary– Firm

– Product

– Data reviewed

• Key reasons for approval or rejection

Quarterly Review

• Update due diligence data for the most recent quarter

• Identify change that would impact future performance– Staff turnover, legal problems, asset flows, etc.

• Published track records are compared to actual client returns (when available), peers, and benchmarks

• Current representative portfolio data is obtained and reviewed for consistency

• Interviews are conducted to clarify information

The Manager Profile

The Manager Profile

• The four-page profile displays the most important due diligence information collected by SAT

– A profile is posted to the web for each Separate Account Manager and mutual fund

• Three pages are for advisor/client use

– Philosophy, performance, risk characteristics, top holdings, etc.

• One page is for advisor use only

– Fee schedule, minimums, sales and service policies

• Profiles are updated quarterly

• Available online

Our Philosophy on Monitoring

• We assume everything in the asset management process is subject to change

• The advisor needs to know about a problem before the client– Monitoring protects client relationships by identifying

the unexpected as soon as possible– Monitoring can improve performance and client

retention while reducing risk

• Assumes the investment process may not be working as intended– Frequent checking is at the core of our multiple monitoring processes

Monitoring Requirements

• The comprehensiveness of our monitoring services depends on the data available to SAT– In-depth: Receive transactional activity (holdings, purchases,

redemptions, income, contributions, withdrawals, industry, style and sector classifications for each security, etc.)

– General: Receive portfolio listing of positions and cash balances

• Monitoring services can be daily, weekly, monthly, or quarterly depending on the frequency of data

Monitoring by SAT

Exception Reporting

• Cash Balances

• Asset Allocation

• Sector Concentration

• Security Price Changes

• Concentrated Positions

Performance Analytics

• Dispersion

• Relative to Benchmarks

• Relative to Averages

• Internal Composite Deviation versus Published Track Record

Portfolio Analytics

• Turnover

• Purchases and Sells

• Portfolio Restrictions

Quantitative Research

• News Clipping

• SAM Distribution Lists

Performance and Cash Monitoring

Manager Alert System

• SAT issues notifications of manager problems or other issues for you to communicate to your clients

– Change in ownership, performance, style drift, staff turnover, risk characteristics, etc.

• Notification includes descriptive information and recommendations• Available online• Base watch list criteria (subject to professional judgment)

– Continued downward trend over two consecutive quarters– Dramatic change in performance– Personnel changes– Organizational/structural changes

Manager Terminations

• Managers may develop problems that can impact short- and long- term performance• SAT immediately establishes contact with the portfolio manager

– What happened and why? What is the action plan? How long will the problem last?– The analyst’s confidence in the quality of the manager’s responses is subjective

Level One(Alert)

Place the manager on the Watch List

Level Two(Hold)

Remove the manager from the Approved List for new business

Level Three(Terminate)

Terminate the manager from existing accounts

Due Diligence and Monitoring Summary

• Institutional-quality due diligence

• Timely problem identification and notification

• Continuous monitoring

• Comprehensive online manager research

• Complete objectivity

• Custom services for larger accounts

• 24/7 access

• Proactive manager termination process

© 2004 SunGard. All rights reserved.

SunGard Advisor Technologies Due Diligence and Monitoring Process.

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