Fund Selection Flashcards
In a broad sense, what is fund selection all about?
“Fund selection is about creating alpha by selecting the best funds and managers that deliver excess returns over a complete business cycle.”
What is the 4 P process of manager selection?
people, process/philosophy, portfolios, and performance
Key considerations for the ‘People’ in the 4P process?
Who is in charge? What are the ownership levels of the principals?
How stable is the team, how do they work together?
A strong team approach lends itself to a measure of stability in that the loss of one individual would not drastically impact fund performance negatively.
Key considerations for the ‘Process’ in the 4P process?
How disciplined is the team to implement their investment process?
What is that investment process?
Can it be easily defined?
Why will their approach result in future outperformance in the near and long future?
Key considerations for the ‘Performance’ in the 4P process?
We compare how a fund performed versus a relevant benchmark as well as performance within its peer group.
We consider the percentile ranking the fund received over different periods of time, including the 1, 3, 5, and 10 year periods.
We target funds in the top quartile in their respective categories.
It is imperative that fund managers demonstrate the ability to consistently perform well throughout different market cycles.
Name a number of fund rating companies?
Longboat, Morningstar, Lipper, FundCalibre, S&P
Name a number of fund rating companies?
Longboat, Morningstar, Lipper, FundCalibre, S&P, CItywire
What is an IPS?
investment policy statement (IPS)
Manager selection is “a xxxxxx step in establishing and implementing a comprehensive investment plan
Final
What does the comprehensive investment plan start with?
starts with formulating an investment policy statement (IPS)
What are the main parts of an IPS?
That IPS articulates investors’
1) objectives (return and risk) and
2) constraints (liquidity, time horizon, taxes, legal or regulatory environment and any unique circumstances) to shape the manager selection process and the ongoing monitoring
Using Paul’s alphabet of Fund selection Criteria what is the letter C?
Capitalization focus - small, mid, large
Using Paul’s alphabet of Fund selection Criteria what is the letter D?
Diversification vs Concentration - to sectors, industries, themes
Using Paul’s alphabet of Fund selection Criteria what is the first letter E?
Expenses - No history of funds with high fees outperforming over the LT
Using Paul’s alphabet of Fund selection Criteria what is the second letter E?
Experience
Credentials (academic qualifications)
Years of experience
cycles been through
Using Paul’s alphabet of Fund selection Criteria what is the letter F?
Fund Family - Have their been significant liquidations or roll ups in the fund family?
Using Paul’s alphabet of Fund selection Criteria what is the letter I?
Independent Rating Agencies
What do they say about the firm / fund / Manager?
Using Paul’s alphabet of Fund selection Criteria what is the letter L?
Length of time in biz for Management firm
Using Paul’s alphabet of Fund selection Criteria what is the letter M?
Management Strength
Does it have enough human capital to execute the processes?
How much experience does each team member have?
Key man risk - how vulnerable is the fund to the loss of one person.
Skills in one area like asset allocation or a certain geographic focus specific role and experience level of the research analyst who tends to have closer relationships with mgmt suppliers and competitors.
Using Paul’s alphabet of Fund selection Criteria what is the letter O?
Objectives
what are the funds objectives?
have they managed to acheive them?
Using Paul’s alphabet of Fund selection Criteria what is the letter P1?
Performance Absolute Relative - vs benchmark versus Peers 1,3,5, 10 years Risk adjusted? Consistency
Using Paul’s alphabet of Fund selection Criteria what is the letter P2?
Process
Rigourous
Inline with stated objectives
Using Paul’s alphabet of Fund selection Criteria what is the letter R?
Risk Management and Downside Focus Standard deviation of returns Maximum drawdown Sharpe ratio Sortino ratio Correlation
Using Paul’s alphabet of Fund selection Criteria what is the letter S1?
Skin in the game
Does the manager invest in their own funds?
Are the manager and unit holder interests aligned
Using Paul’s alphabet of Fund selection Criteria what is the letter S2?
If the fund size is too large relative to its investment universe it may be difficult for the investment company to invest in illiquid, mid- to small-cap stocks.
Lots of evidence of decreasing returns with scale
However, Size of the firm can be an asset as they are able to hire some of the brightest asset managers.
Using Paul’s alphabet of Fund selection Criteria what is the letter T?
Does the fund have high turnover or
Does it have high manager turnover
Using Paul’s alphabet of Fund selection Criteria what is the letter U?
Underperformance After periods of significant U, did we see Shifts in risk appetite, Shifts in net exposures Shifts in industry or sector exposures shorter time horizons, style drift
