The Callan Search Process. Callan Associates Knowledge for Investors

The Callan Search Process Callan Associates Knowledge for Investors

The Callan Search Process Brings customized process and results to each client Inclusive process to investment manager firms and their products Peer review process delivers consistent and actionable results for clients Research and field consulting professionals work together for the benefit of the client Callan Associates Knowledge for Investors 1

CALLAN INVESTMENTS INSTITUTE Callan Five-Year Search Activity: 2006 2010 No. of Searches Five-Year Year-to-Date Search Activity: 2006-2010 2011 $ Millions Allocated No. of Managers Hired No. of Different Managers Hired No. of Searches $ Millions Allocated Domestic Equity 253 $42,098.60 236 160 25 1,574.00 Domestic Fixed Income 117 $32,175.00 111 69 21 2,034.00 Domestic Balanced 14 $945.20 12 6 1 International/Global Equity 156 $54,542.10 156 92 30 3,687.00 International/Global Fixed Income 12 $1,447.40 8 8 2 50 International/Global Balanced 8 $756.50 6 5 2 850 Stable Value 1 50 Private Real Assets 90 $9,244.50 69 43 32 1,943.00 Hedge Fund of Funds 21 $2,851.00 21 14 7 995 Private Equity 27 $4,237.00 32 31 2 120 Other 1 $2,250.00 2 2 2006-2010 Totals 699 $150,606.30 653 430 * 123 11,303.00 * This number represents the number of different managers hired over the five-year period; there are duplications from year to year and among the asset class. Manager Search Trends Callan Associates Knowledge for Investors 2

Callan Search Process Disciplined Find the best fit for client Existing management structure critical Candidate profile controls process Significant interaction between the specialist and generalist Specialist focal point provides firm leverage Generalist knows client s likes and dislikes Challenge is getting to the committee Committee reviews screening process and asks why obvious contenders were not included Sponsors inputs (i.e., look at XYZ) definitely can help Greater ease in capacity constrained product areas Tenure, asset base, track record issues Committee accumulated experience provides added perspective Greg, Janet and Kevin all former specialists Members work with majority of our largest most sophisticated clients All see large number of managers through clients and independently Be aware of consulting meeting schedule Callan Associates Knowledge for Investors 3

Manager Search Database You can use Callan data with confidence we stand behind the data because we own and control it. INVESTMENT MANAGER DATABASE A Client Related Analyses Over 150 searches/year Hundreds of managers analyzed/year as part of client performance measurement Domestic Equity Fixed-Income Balanced International Equity Fixed-Income Balanced Additional Real Estate Hedge Funds Other (currency, derivatives, etc ) TOTAL Number of Products 2,679 1,106 246 1,206 219 47 198 236 Number of Managers 683 275 90 468 121 28 69 147 79 54 6,016 1,239 A Managers are never charged a fee to be in Callan s database Investment Manager Meetings 800 in-house/year 300 on-site/year Additional meetings in regional offices and with clients Plus an additional 10,000+ Mutual Funds Callan Associates Knowledge for Investors 4

Search Committee Senior Generalists Yrs with Callan Yrs in Industry Office Manager Search Committee Janet Becker-Wold, CFA 17 26 Denver Ken Brunke 32 45 Chicago Jim Callahan, CFA 18 20 San Francisco Greg DeForrest, CFA 13 13 San Francisco Gordon Dickinson 24 28 Chicago Kevin Dolsen, CFA 12 12 Chicago Paul Erlendson 25 28 Denver Bill Howard, CFA 10 13 Denver Mark Kline Mike O Leary, CFA Paul Troup Greg Ungerman, CFA Millie Viqueira 18 27 22 13 20 38 42 42 13 26 New Jersey Denver Atlanta San Francisco New Jersey Meets weekly Reviews all manager search projects for manager knowledge and quality control 13 senior professionals Average experience of 19 years at Callan and 27 years in the industry Callan Associates Knowledge for Investors 5

Search Process Generalist & Client Full Database Specialist & Generalist Typically 18-25* Specialist & Generalist 10-14* Committee, Specialist & Consultant 4-8* Consultant & Client (staff) 3-6* Staff, Client Committee, Consultant * numbers are typical variances will depend on clients search criteria Callan Associates Knowledge for Investors 6

How Does Callan Evaluate Investment Managers? A Combination of Qualitative and Quantitative Analysis Quantitative research: Consistency of Investment Performance Analyzing the Portfolios Return-based style analysis Traditional holdings based analysis MSCI s Z-score methodology Qualitative research: Kicking the Tires Requires ongoing interaction with managers to understand their philosophy, process and people It is instructive to know how managers view themselves Callan Associates Knowledge for Investors 7

How Does Callan Collect the Data? GENERAL INFORMATION Organizational Statistics Product Specific Information PERFORMANCE DATABASE Quarterly Rates of Return 1,049 organizations; 4,082 different funds; all mutual funds MONEY MANAGER VISIT REPORTS ON-SITE Qualitative impressions of money manager s philosophy, style, investment process Verification of Information MONEY MANAGER VISIT REPORTS IN-HOUSE Qualitative impressions of money manager s philosophy, style, investment process Verification of Information MUTUAL CLIENT RELATIONSHIPS Qualitative impressions of money manager s philosophy, style, investment process Verification of Information Annual Questionnaire Updated Quarterly from Money Managers Visits to money manager s offices by Global Manager Research staff and consultants Average of 500 visits per year Visits by money managers to Callan s four offices Average of 1,000 visits per year Active evaluation of Callan s performance evaluation work with clients Callan Associates Knowledge for Investors 8

Which Factors Matter the Most? Qualitative Factors Quantitative Factors Callan Associates Knowledge for Investors 9

Which Quantitative Data Points Matter the Most? GIPS compliant composite return data Rolling three-year return data - consistency Rising and falling market-cycle returns Risk-adjusted returns (e.g., Sharpe Ratios) Other risk measures (e.g., Information ratio, downside risk, alpha, standard deviation, tracking error) Z-scores Security Count 2.5% 2.0% Rolling Three Year Relative Returns vs MSCI EAFE Index XYZ Manager exceeded the benchmark return in 11 of the 17 available rolling periods. Relative Returns 1.5% 1.0% 0.5% 0.0% XYZ Manager exceeded the peer group median return in 1 of the 17 available rolling periods. Rolling period score is 35%. (0.5%) (1.0%) (1.5%) 2007 2008 2009 2010 2011 XYZ Manager CAI Core Int'l Equity Callan Associates Knowledge for Investors 10

Other Important Qualitative Factors Investment Philosophy: Clearly articulated? Based on sound theory and empirical evidence? Investment Strategies: Top down? Bottom up? Sector based? Regional? Integrated? Thematic? Relaxed constraint (130/30) Unconstrained Research Orientation: Quantitative? Qualitative? Fundamental price/value framework? Decision-Making Process: Committee-driven? Star PM? Blackbox? Cultural and Environmental Values Risk Controls: What tools or strategies does the manager use to control risk? Callan Associates Knowledge for Investors 11

Alternatives Review Committee Greg Allen Ryan Ball Jim Callahan Greg DeForrest Kevin Dolsen Mark Kline Michael O Leary Ron Peyton Jamie Shen* Paul Troup Millie Viqueira *Chairperson Callan Associates Knowledge for Investors 12

Alternatives Research & Search Specialty consulting basically follows the same principles and approach with several distinctions. Specialists frequently work directly with clients and also support generalists. For example, open-end real estate searches are very similar to public markets as are real estate securities searches. Client may never see specialist. Value added or opportunistic require RFI process. Specialist/client contact tends to be high. Private equity utilizes RFI process. Specialist/client contact tends to be high. Hedge fund of funds often involve significant direct contact with specialists. Specialists often are directly involved with client educational efforts and assist directly in development of client and candidate profiles, client policy and specialized performance measurement. Callan Associates Knowledge for Investors 13

Hedge Fund-of-Fund Manager Search Screening Process Purpose Identify prospective multi-manager advisors within given investment style applying prudent fiduciary standards Sample criteria to consider for fund-of-fund search SEC-Registered Investment Advisor (RIA) Minimum total $AUM (e.g., greater than $1 billion) Acceptable degree of manager and risk transparency provided Minimum manager diversification (e.g., 20 or more) Maximum individual manager exposure (e.g., 10% or less) No investments in affiliated hedge fund managers, unless addressed with appropriate fiduciary oversight Above criteria narrows universe to 150 or so managers. Callan Associates Knowledge for Investors 14

Hedge Funds Manager Search Ranking Process Aggregate rank derived within specified style mandate Organization and product-related factors Experience (e.g., length of firm and fund history) Asset base (e.g., firm and fund size, including recent growth) Strategic diversification (e.g., largest sector exposure) Manager diversification (e.g., average and largest manager exposure) Fees (e.g., average fee based on array of gross returns achieved) Liquidity (e.g., lock-up, redemption, side-pockets and notice periods) Performance-related factors, using rolling periods of 12 months % positive excess return Annual return Standard deviation Sharpe ratio Correlation with S&P 500 and/or other market proxy Callan Associates Knowledge for Investors 15

Callan Team Kelly Cliff, CFA SVP, CIO Public Markets Co-lead Global Manager Research (GMR) Inga Sweet SVP, Manager Publish Research Group Co-lead Global Manager Research (GMR) Domestic Equity Fixed Income James Danforth, CFA Lauren Etcheverry CFA Mark Stahl CFA Steve Center Brett Cornwell CFA Matt Routh Callan Associates Knowledge for Investors 16

Callan Team International Equity Andy Iseri, CFA Matthew Schmelzer, CFA Real Estate Jamie Shen Sarah Angus Sally Haskins Avery Robinson Jay Nayak Callan Associates Knowledge for Investors 17

Callan Team Private Equity Gary Robertson Michael Bise Hedge Funds Custody Jim McKee Sherwood Yuen Virgilio Bo Abesamis Callan Associates Knowledge for Investors 18

Callan s Oversight Committees Each Client Benefits from Collective Experience & Expertise Client Policy Review Committee Manager Search Committee Defined Contribution Committee Meets as projects occur Reviews all strategic planning projects for best thinking and quality control 12 senior professionals Average experience of 20 years at Callan and 25 years in the industry Meets weekly Reviews all manager search projects for manager knowledge and quality control 13 senior professionals Average experience of 19 years at Callan and 27 years in the industry Meets monthly Reviews defined contribution projects for best thinking and quality control 14 senior consultants Average experience of 14 years at Callan and 19 years in the industry Callan Associates Knowledge for Investors 19

Capital Markets Research Group Jay Kloepfer Director of Capital Markets and Alternatives Research Jason Ellement, CFA, FSA, MAAA Karen Harris, ASA, CFA Julia Moriarty, CFA Eugene Podkaminer, CFA James Van Heuit Callan Associates Knowledge for Investors 20

Callan s Defined Contribution Practice Not Pictured Lori Lucas, CFA Defined Contribution Practice Leader Jamie McAllister James Veneruso, CFA Callan Associates Knowledge for Investors 21

Public Market Research Kelly Cliff, CFA Inga Sweet Steve Center Brett Cornwell, CFA James Danforth, CFA CIO of Public Markets, and co-lead of the Global Manager Research Group Co-lead and Manager of the Global Manager Research Group and Manager of the Published Research Group Fixed Income Fixed Income Domestic Equity Lauren Etcheverry, CFA Andy Iseri, CFA Matt Routh* Mark Stahl, CFA Matt Schmelzer, CFA Domestic Equity International Equity Fixed Income Domestic Equity International Equity *passed level 3 of the CFA exam Callan Associates Knowledge for Investors 22

Alternative Investment Research Sarah Angus, CAIA European & Latin American Real Estate Timber Sally Haskins General & Asian Real Estate Matthew Routh Commodities Public & Multi-Strategy Real Return Michael Bise Private Equity Jim McKee Hedge Funds Jamie Shen General Real Estate, Agriculture Kelly Cliff, CFA Public & Multi-Strategy Real Return Commodities Steve Center TIPS Jay Nayak Public Real Estate Securities & Debt Strategies Timber Gary Robertson Private Equity Private Energy Lauren Talbot General Real Estate Sherwood Yuen Hedge Funds Brett Cornwell, CFA TIPS, MLPs Avery Robinson Core Real Estate Infrastructure Callan Associates Knowledge for Investors 23

The Callan Business Model A diversified revenue stream has been critical to our ability to continue to reinvest in our people and our proprietary systems. It is what allows us to deliver greater capability to our clients at more competitive fees. Fund Sponsor Consulting Clients include defined contribution, pension, foundation and operating assets 322 clients $1.5 Trillion in assets 65% of Callan s revenues Fund Sponsor IAG ICG TAG Independent Advisor Group (IAG) Clients include middle market consulting firms and financial intermediaries 30 clients 10% of Callan s revenues Institutional Consulting Group (ICG) Clients are investment management organizations 180 clients $3.5 trillion in assets 20% of Callan s revenues Trust Advisory Group (TAG) Clients include very large defined benefit plans New business line in 2006 5% of Callan s revenues Callan Associates Knowledge for Investors 24