Performance Scorecard: Hiring, managing and changing managers

Transcription

1 November 2009 Performance Scorecard: Hiring, managing and changing managers Nicolai Berg, Nordic Head of Investment Consulting

2 Agenda Introduction Investment Consulting Historical performance as indicator of future performance Performing efficient manager selections Monitoring existing managers Selecting a partner in manager selection 1

3 Active investment management Background Active investment management in aggregate is a zero sum game Why? Because all managers in aggregate earn the market return Active managers in aggregate incur higher costs Therefore in aggregate active managers lose But can t the winners exploit the losers! Holy Grail is to consistently identify the winners 10-year track records for 42 asset classes covered by our research. The average of the 10-year value added figures for these asset classes is 1.3% per annum against benchmark 2

4 Agenda Introduction Investment Consulting Historical performance as indicator of future performance Performing efficient manager selections Monitoring existing managers Selecting a partner in manager selection 3

5 Investment framework 4

6 investment Consulting Our global resources 500+ European investment consulting staff 15 manager researchers 350+ American investment consulting staff 30 manager researchers 17 manager researchers s investment consulting offices 20+ ~50 used 200+ MANAGER, STRATEGIC AND CAPITAL MARKETS RESEARCHERS AROUND THE WORLD 150+ APAC investment consulting staff 5

7 Investment Consulting: Philosophy We believe: Skillful managers do exist More and better research is critical to identifying these skillful managers Qualitative and quantitative inputs are both essential but, ultimately, the judgement on a manager is subjective There is no single way to generate outperformance Combining managers with complimentary styles will produce more consistent returns Efficient portfolio implementation is key to retaining value 6

8 Investment Consulting: Manager Research Success factors Dedicated Resources 70+ Research Professionals, Globally Proven Track Record We measure our value added Expertise Robust Research Platform Global Consistency Four Factor Framework Structured Rating Process GIMD Database Analytical Rigor Manager Performance Analytics Portfolio Structure Toolkit 7

9 Agenda Introduction Investment Consulting Historical performance as indicator of future performance Performing efficient manager selections Monitoring existing managers Selecting a partner in manager selection 8

10 Historical performance Does picking the winners work? We are all familiar with the disclaimer Past performance should not be taken as a guide to future performance Begs two questions Does outperformance persist? Do we give past performance too much attention? 9

11 Performance Analytics Peer group relative results - No evidence of persistence Proportion of top half of managers as at 03/09 Proportion of top half of managers as at 03/08 Proportion of top half of managers as at 03/04 Proportion of top half of managers as at 03/03 Upper as at 03/06 Lower as at 03/06 Upper as at 03/05 Lower as at 03/05 Upper as at 03/01 Lower as at 03/01 Upper as at 03/00 Lower as at 03/00 UK Equity 44% 56% 46% 54% 58% 42% 44% 56% Global Equity All 51% 49% 60% 40% 55% 45% 25% 75% Global Equity Growth 58% 42% 60% 40% 40% 60% 22% 78% Global Equity - Value 40% 60% 65% 35% 69% 31% 40% 60% Proportion of the top two quartile managers that were in the top two quartiles for the prior 3 year period 10

12 Benchmark relative results Marginally more encouraging 100 % 90 % 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % 51 % US Large Cap Source: Investment Consulting 59 % US Small Cap 50 % International Equity 59 % Int'l Small Cap Notes: Performance exceeds index by 100bps in both Initial and Subsequent Periods Percent Successful: Score of 50% or more. Initial Periods: 31/12/1995 to 31/12/2003; Subsequent periods: 31/12/1998 to 31/12/2005 Three year rolling periods, quarterly data Mean 46 % US Fixed 11

13 Does outperformance persist? Conclusions Some evidence of persistence versus a passive benchmark No predictive power in peer group study Higher hit rate in more inefficient asset classes Relying on past performance likely to lead to disappointment If past history was all there was to the game the richest people would be librarians (Warren Buffett) Critical to focus on qualitative evaluation 12

14 Agenda Introduction Investment Consulting Historical performance as indicator of future performance Performing efficient manager selections Monitoring existing managers Selecting a partner in manager selection 13

15 Manager selection Process Research Process Portfolio Construction Portfolio Monitoring and Management Responsibility: Manager Research Investment management team Solution Manager Universe 3,000+ Managers, 20,000+ Products, 2,500+ Research Meetings p.a. Highly Rated Managers A, A- s investment management team Client Investment Portfolios 14

16 Manager selection Screening the research universe to identify candidates for in-depth research which ones appear to have the strongest credentials? Review of GIMD entry Firmwide demographics Investment process description Staff information Historical performance track record + Previous research On this strategy On this firm On the key people at their previous firm + Market intelligence From consultants From clients From other managers From industry and academic publications = Determine research priorities 15

17 Manager selection Four specific factors we seek to evaluate Idea generation The key attribute that a manager needs to possess to have potential to outperform over the long term is the ability to generate value-adding investment ideas Portfolio construction The quality of a manager s portfolio construction process will determine how effectively its value-adding investment ideas are converted into consistent outperformance Implementation For a manager to outperform, the value added through its investment ideas and portfolio construction process must outweigh the drag on its performance due to transaction costs Business management Well-managed investment firms are more likely to maintain and enhance the competitiveness of their investment strategies over time than poorly managed firms 16

18 Idea Generation Without good idea generation all the other factors are irrelevant. It is in this area you need to identify what you believe to be the manager s competitive edge. The managers should concentrate on maintaining and enhancing their edge and in exploiting it. The edge can lie in either or both of people and process 17

19 Portfolio Construction Clearly managers need to be able to capture value adding ideas effectively and thus the construction process is important Even managers with an unconstrained approach need to be aware of construction issues Problems arise when unwanted risk comes to dominate portfolios. This is generally a residual of the stock selection process The ideal is to find a manager who has thought about any residual risk from a variety of different perspectives and where relevant takes action to minimise such risk Do discuss with your managers and get them to identify particular stock, sector and macro risks to which you are exposed Be wary of managers who appear blasé about such risks it is probable that one day the downside risk will be realised 18

20 Implementation Is your manager aware of what the implementation costs are? Be wary of those who measure implementation costs and claim they are negligible The real issue is often purchases and sales you don t make because it is so expensive Managers in general do take capacity more seriously than in the past Its impact is greater in higher-turnover more short-term strategies For longer-term investors there are distinct advantages in owning a larger proportion of the Equity of any one company Do ask your managers about their dealing capability and what evidence they can produce that they implement cost effectively Be aware of the impact of other strategies that invest in the relevant market Where relevant have an idea of capacity and be prepared to terminate if the manger is not taking the issue seriously Significant value can be lost through inefficient implementation Problems generally arise as assets under management grow Can be an issue for smaller firms if dealing is not done well 19

21 Business Management Asset management should be a core business Understand the business goals Small owner-managed firms have many attractions What is it that makes a firm an attractive place to work Do spend some time trying to understand your manager s business model Be wary of change Understand how your manager s remuneration is aligned to the success of the product in which you are invested 20

22 Manager Selection process Example from Investments Our seven step approach to selecting managers: Select managers Compliance due diligence Optimize combinations of managers Assess organizational and product fit Select Shortlist candidates Fingerprint candidates Review of IC s highly rated managers Analysis and research Meetings with managers 21

23 Agenda Introduction Investment Consulting Historical performance as indicator of future performance Performing efficient manager selections Monitoring existing managers Selecting a partner in manager selection 22

24 Monitoring Your Managers 1 Its an ongoing process and you should follow managers that are an alternative to the existing ones. This makes the hurdle for changing managers lower. For each product you should have a clear idea of what it is you like and what you consider to be its edge Every time you evaluate a product you should do so against the above criteria You should not be concerned by past performance (difficult in practice). The question you should always ask is do we believe this product will outperform over the next three to five years 23

25 Monitoring Your Managers 2 Recognise that investment processes evolve. Are any changes evolutionary and anticipatory? These are generally better than major and reactive changes. Get managers to talk through stock examples. Of course they will know more about the stock than you (hopefully) but you may be able to see evidence of lateral thought processes. Is the manager demonstrating the ability to think outside the box What have they learned about investing over the recent past? What is their current biggest concern from an investment perspective and what are they doing about it? 24

26 Monitoring and Removing Managers Manager Monitoring Tools Catalyst for Change Key staff departure Organisational change Strategy changed Style drift Portfolio design Loss of confidence Better manager identified Compliance Issues Performance Risk Weekly performance updates Weekly GIMD TM report Monthly manager reports Quarterly monitoring reports return risk style consistency performance attribution trading activity other strategy specific factors Regular manager calls/meetings Manager review schedule IC manager review schedule Time and Cost Efficient Manager Changes Maintain manager reserve bench 25

27 Monitoring Process example from Investments Sub-Adviser 14 Factor Evaluation & Monitoring Grid: 26

28 Agenda Introduction Investment Consulting Historical performance as indicator of future performance Performing efficient manager selections Monitoring existing managers Selecting a partner in manager selection 27

29 Evaluating an external partner in manager research potential key requirements 1. Quality of manager research 2. Quantitative data 3. Qualitative data 4. Coverage 5. Analytical tools 28

30 Making Manager Decisions Summary Idea Generation Business Management Manager Governance Implementation Portfolio Construction Focus attention on the above four factors (especially Idea Generation) Pay little attention to past performance 29

31 Important disclosure IC affiliates & services Manager Performance Analytics ( MPA ) is a proprietary performance analysis software package. It provides comprehensive analysis of investment managers past performance against their peers, a peer group or a relevant index over any time period. This product enables the user to perform the same types of analyses of past investment performance as consultants and manager researchers. This database can be purchased by investment managers in certain jurisdictions in which operates for a quarterly subscription fee. Investment managers who purchase MPA are told that their purchase will not result in any preferential treatment by in its evaluation of or recommendations of investment managers. charges no fees to investment managers to include their information in our Global Investment Manager Database (GIMD ). provides manager research services to a limited number of manager-of-manager providers, including s Investment Management business. This does however give rise to a potential conflict of interest in that we may on occasion be in a position where one of the managers of managers to whom we sell research appears on the short list in a manager of managers selection exercise. In order to manage the potential conflict, we disclose fully our interests to clients. More broadly we have written compliance procedures, including a code of professional conduct, which govern the process for consulting with clients. 30