Manager Evaluation

Our analytical process is to affirm that the manager is:

  • Consistent in style
  • Achieves according to the style benchmarks
  • Performing as outlined in the Investment Policy Statement (IPS).

The whole of the analytical process is to determine the specific performance of the manager so as to allow us to make an appropriate recommendation.

We segment and monitor the style of a manager (Large Cap Growth, Large Cap Value, Small Cap Growth, Small Cap Value, International Growth, International Value, Emerging Markets, Fixed Income, Alternative Investments and Real Estate, etc.) using a six-step process:

  1. Fundamental Analysis
  2. Style Correlation Analysis
  3. Benchmark and Peer Evaluation
  4. Returns Based Style Analysis
  5. Style Component Analysis
  6. Manager Status

Step 1 - Fundamental Analysis

We evaluate the actual holdings in the manager's portfolio. We look at position sizes, sector weightings, growth rates of the portfolio companies (EPS growth rates, etc.) and valuation ratios (Price to Earnings, Debt to Capital, Return on Equity, etc.). Using this technique we analyze a manager's portfolio compared with peers, benchmarks and their own stated style.

Step 2 - Correlation Analysis

We analyze a manager's performance using benchmarks and peer groups. We compare a manager's historic results with at least 17 different style indices using correlation analysis to identify an index which seems to best represent a manager's style. We compare these results with our Fundamental Analysis from step one and the manager's stated style to ensure all three agree. We examine R-squared and tracking error (among other ratios) as indicators of a manager's style or deviation thereof.

Step 3 - Benchmark and Peer Group Analysis

Having ascertained the appropriate benchmark and the resulting peer group, we then evaluate the manager's performance over various time frames. We evaluate absolute returns, risk and risk-adjusted returns versus the style index and the peer group with an eye towards consistency. We also evaluate the timing of a manager's returns - e.g. did the manager outperform because of one particular good quarter or is there a pattern of consistently superior performance?

Step 4 - Returns Based Style Analysis

Using quantitative regression analysis, we evaluate a manager's returns versus various style specific benchmarks. We use returns based style analysis to determine what blended style the manager's returns most closely match. For example, a large cap growth manager may act like a large cap growth manager with a small mix of small cap value. This Returns Based Style Analysis is used to confirm the manager's style with the Fundamental Style from step one, the Benchmark and Peer Group analysis from step two and the manager's stated style. Utilizing our manager scoring model, a composite score is assigned after all three steps are complete. This score is later utilized to assess the status of the manager in representation to the plan.

Step 5 - Performance Attribution

At this stage for domestic equity styles we analyze the components of return from the manager looking at actual holdings and deriving from this the components of return intrinsic to this manager's investment process. We determine whether the manager adds value from stock picking discipline, sector weighting discipline or market timing of investments. These qualities are immeasurably useful for understanding the underlying drivers of return and it keeps managers accountable to their own investment process.

Step 6 - Manager Status

Among the investment styles approved by the policy we monitor for consistency of manager(s) to the stated style. Where managers perform below the standards set by the policy or where changes are made. We specifically make recommendations to alter a manager from good standing to watch list to potential termination as dependant on our findings and opinion on the underlying factors affecting the specific manager in review.

We believe there are four essential issues for manager retention and/or termination:

  1. rationality and integrity of style,
  2. performance, in the context of that style,
  3. the personnel to repeat that performance and
  4. material and or repeated violations of the investment policy

Recommendations to terminate may result if a manager's style begins to veer away from the style under which they were retained. Additionally, such a recommendation may result if performance is below appropriate benchmarks for an extended period, if there is a significant change in the investment personnel or structure of the firm and if there are violations of the investment policy.